Markets: Fixed Income
On Tuesday, risk aversion continued to dominate trading following the sharp losses on the US equity markets with the S&P-500 falling below key support levels. Yesterday, equities were again lower and the Itraxx Crossover Index set new highs. Global bonds however couldn’t really benefit and closed the session little changed. Data-wise, the calendar was fairly thin, but nevertheless in the US the pending home sales as well as the car sales disappointed again.
In the US, yields were slightly higher compared to Monday. 2-year yields were up 0.8 basis points, 5-year yields 1.6 basis points and10-year yields 1.5 basis points. The 30-year sector outperformed, as yields fell 0.9 basis points. In the euro zone, there was a clear steepening of the yield curve, as 2- and 5-year yields fell respectively 1.9 and 0.4 basis points, while 10- and 30-year yields were up 1.8 and 2.7 basis points. The Greek spread widened sharply following the announcement of a new 10-year benchmark.
US Treasuries cannot build out recent gains
Today, the calendar contains the weekly mortgage applications, the ADP employment report and the non-manufacturing ISM. In January, employment showed the third consecutive decline by more than 500 000 and for February, an improvement is not yet expected. The consensus is looking for a decline by 630 000 in ADP employment and a plunge by 650 000 in the official payrolls. We have no clear view on the outcome, but all available evidence points to another awful figure. Last week, continuing claims surged above 5 million, also temporary help agencies showed no improvement last month and labour market conditions deteriorated further in the manufacturing sector, according to the latest ISM survey. Non-manufacturing ISM is expected to decline in February after improving somewhat in December and January. The headline index is expected to drop from 42.9 to 41.0, but the risks might be on the upside of expectations after the stronger than expected manufacturing ISM.
The Fed announced it will start its TALF program on March 25 and hold monthly funding through December or longer if needed. The program may generate up to $1 trillion of lending for businesses and households. The TALF is designed to re-open the securitization market by providing financing to investors to support their purchases of certain AAA-rated ABS. The RBNY will start lending up to $200 B to eligible owners of certain AAA-rated ABS backed by newly and recently originated auto loans, credit card loans, student loans and SBA-guaranteed small business loans. The TALF loans have maturity of 3-year, will be non-recourse and fully secured by eligible ABS. The Treasury provides $20B of credit protection.
Regarding trading, Treasuries couldn’t extend the gains of the previous two days and closed the yesterday’s session slightly lower. Equities traded volatile during the day, but finally closed again lower with the S&P 500 falling below the 700 level. This however could only limit the losses on the Treasury market, which is rather disappointing. The data were Treasury-friendly, but could only temporary support the Treasury market. Bernanke’s comments that policymakers might need to provide further aid to the banking system beyond the $700B already approved might have increased concerns about supply.
The technical pictures have improved slightly over the previous days, but yields nevertheless remain close to important resistance levels. The 5-year yield is building a higher high, high low pattern. The graph also shows a double bottom with neckline at 1.80% (targets 2.22% and 2.42%). A distinct break above the previous high at 2.11% would be a negative development. A similar picture is developing in the 10-year maturity, although the test of the 3.05% level last week failed. A double bottom with neckline at 2.60% and targets at 3.06% and 3.17% is eye-catching. While there are some risks from the technical point of view, one might consider establishing some longs in the neighbourhood 3.06/17% for the 10-year yield. Some stop loss protection is warranted though.
Greece to issue a new 10-year benchmark
Today, the euro zone data calendar is thin, as it only contains the final figures of services and composite PMI (February). According to the first estimate, euro zone services PMI dropped from 42.2 to 38.9, while a slight increase was expected. The details showed that weakness was broad-based, as every sub-index dropped to a new low. The consensus expects the final figure to confirm the first outcome.
On the supply front, Greece is planning to issue a new 10-year benchmark for an amount of around €5B and has set the initial price guidance in the area of 270 basis points over mid-swaps. This would be a huge premium compared to the previous benchmark, which is currently trading at around 220 basis points over mid-swaps. Ahead of the issuance, Greek bonds are again underperforming their peers, along with Ireland. The difficulties in raising money from the financial markets have recently stirred talk about a potential default of both countries. Yesterday, EU monetary affairs commissioner Almunia indicated that the euro zone authorities would provide help to a member-state in serious difficulties. Thereby, he echoed earlier comments of the German and French Finance Ministers. Up until now, these comments have however failed to ease investors’ concerns and most intra-EMU spreads are still very close to their widest level.
Regarding trading, German bonds failed to build out Monday’s gains, despite more equity weakness. The short end outperformed, but the losses at the longer end are disappointing. As such, the Bund is still in its recent sideways range between 124.37 and 126.01/05, as investors are caught between concerns about supply and the ongoing weakening of the economic outlook. Yesterday, several ECB governing council members indicated that the ECB is discussing more unconventional monetary policy measures to support the economy, but it looks that no decision will yet be taken on Thursday’s policy meeting.
In the UK, the calendar contains the services PMI. In February, services PMI is expected to show a slight decline (41.9 from 42.5) after rising in the month before. The risks might be on the downside of expectations after the weaker than expected manufacturing and construction PMI earlier this week.
On the supply front, the DMO will issue a new ultra-long conventional Gilt 4.25% Sep39 for an amount of £2.25B. Last week, demand for the new 4% Mar22 issue disappointed and sent longer-term yields sharply higher. Yesterday’s tap of the 2-year Gilt went however much better. As a result, there was a sharp steepening of the yield curve. Also in the UK, investors have to balance the huge amount of supply against the measures the Bank of England is planning to take by buying Gilts. Tomorrow, Chancellor Darling is expected to give the Bank of England the power to start buying Gilts.
