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Sunrise Market Commentary

Bund closing in at key resistance levels

Tue, Aug 25 2009, 10:48 GMT
by KBC Market Research Desk

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Markets: Fixed Income

On Monday, government bond markets staged a late rebound once the rally on the US equity markets faded. During the morning session and in the early afternoon, government bonds were still under some minor pressure on the back of the ongoing positive sentiment on the equity markets and better than expected new industrial orders in the euro zone. Indeed, most European equity indices closed at new 2009 highs, but following a higher opening of the US equity markets the rally faded and US equities closed almost unchanged. Government bond markets were also supported by the reassuring message from central bankers at last weekend’s Jackson Hole meeting, where they indicated that monetary policy will remain ultraaccommodative for the foreseeable future.

In a daily perspective, US yields reversed a large part of Friday’s huge gains in a further sign that the upside pressure on yields is rather limited for the moment, despite increasing signs of a global economic recovery. In contrast to the German bond market, the yield curve in the US flattened slightly, as 10-year yields declined by 9 basis points compared to 7.4 basis points in 2-year yields. In Germany, 2-year yields declined by 4.4 basis points, while 10-year yields were only down by 0.7 basis points. This outperformance was however partly due to the earlier closing of the cash market in the euro zone.

Bund closing in at key resistance levels

Today, the calendar is well-filled in the US with the Conference Board’s consumer confidence (August), the S&P Case Shiller home prices (June), the Richmond Fed (August) and June house price index. Last month, conference board’s consumer confidence fell from 49.3 to 46.6, while only a marginal deterioration was expected. For this month, a slight improvement (to 47.6) is expected, but we believe that the risks might be on the upside of expectations after last month’s deterioration. In May, S&P Case Shiller home prices rose for the first time (on a monthly basis) since July 2006, while the annual pace of decline slowed further. For June, the consensus is looking for a further slowing in the pace of decline from -17.06% Y/Y to -16.4% Y/Y. Also in June, the house price index is expected to have risen by 0.4% M/M. The Richmond Fed manufacturing index is forecasted to extend its rebound in August (16 from 14). After the upward surprise in the NY and Philadelphia Fed, we don’t exclude a higher outcome. In the euro zone, the calendar contains the Belgian business confidence survey, which is expected to post its fifth consecutive improvement. Following the better than expected PMI surveys, the risks are on the upside.

On the supply front, the US Treasury will auction a $42B 2-year Note, which will raise around $23B. Recently, the US auctions went rather well, despite the record amounts on offer.

Regarding trading, over the past month, government bond markets have remained quite well supported despite the general improvement in the economic outlook. Indeed, despite the rally on the equity, commodity and credit markets, yields are still well below the year highs set at the beginning of June. The improvement in risk appetite has nevertheless led to a dramatic tightening in the credit spreads, which has even pushed several EMU countries’ yields to new cycle lows. Last Friday’s technical break higher on the equity markets suggests that risk appetite is still improving and that the tightening in spreads is not over yet. At the same time, central bankers at the annual Jackson Hole symposium repeated they don’t plan an exit strategy yet, which should keep yields rather low. Yesterday’s trading action indeed confirmed that the upside pressure on yields is quite limited now, as yields fell immediately once the rally on the US equity markets faded. From a technical point of view, US 10-year yields failed to re-test the 4% level in August and even fell below its uptrend line recently (see graph above). Next important support is seen at around 3.25%, which is the neckline of a potential double top formation. In Germany, similar support is seen at around 3.25%. A break below would bring the cycle lows again in the picture (see graph below).

In the UK, the BBA will publish its mortgage lending figures. Yesterday, a report of Royal Bank of Scotland showed that house prices were still expected to fall another 12.7% before levelling off, despite recent signs of improvement. This evening, BoE’s Bean will speak in Barcelona on the ‘the great moderation, the great panic and the great contraction’. At the August meeting, Bean voted in favour of a £50B increase of the asset purchase facility.

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Published on  Tue, Aug 25 2009, 11:04 GMT

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