Markets: Fixed Income
On Monday, global bonds couldn’t really benefit from the profit-taking seen in the equity and commodity markets, as supply concerns flared up ahead of this week’s $59B of US Treasury auctions.
In a thinly traded session, devoid of market-moving data, equity investors grew again more cautious ahead of the start of the US earnings season this evening. This helped bonds to recoup their opening losses during the European session, as equity investors took their chips off the table. The intra-day correlation between equities and bonds however watered down during the US session, as the Federal Reserve purchased only $2.53B in Treasuries, which was less than had been expected. As such, bonds fell off the highs and even set new lows in the US, as the US equity markets rebounded slightly later in the session and ahead of this week’s massive supply.
Overall, global bonds posted a mixed performance with slight losses in the US and slight gains in the euro zone. In the US, yields were up around 3.5 basis points across the yield curve, except for the 2-year sector where yields declined by 0.8 basis points. In the euro zone, German yields declined slightly with 2- and 10-year yields down by 0.3 basis points and 5-year yields by 1.2 basis points. The 30-year sector underperformed up by 1.7 basis points. Outside Germany, yields fell even more, as the intra-EMU sovereign spreads continued to decline rapidly, despite the deterioration in sentiment on equity markets.
Short-term technical picture Bund still bearish
Today, the calendar is thin as it only contains the final figure of euro zone’s fourth quarter GDP. Euro zone GDP contracted by 1.5% Q/Q in the fourth quarter of 2008, according to the preliminary report. We expect the final figure to confirm the preliminary outcome and no significant revisions are expected in the details. For the first quarter of this year, we might see an even bigger contraction. In the US, no marketmoving data are scheduled for release.
On the supply front, Austria will tap two longer-term bonds today, as it plans to sell €0.88B of its 10-year RAGB 4.35% March 2019 and €0.55B of its 30-year RAGB 4.15% March 2037. Today’s auctions will be a good test for the recent narrowing of the intra-EMU sovereign spreads. Along with the general improvement in risk appetite, the intra-EMU sovereign spreads have narrowed quite significantly over the past weeks. Recent UK Gilt auctions have however indicated that investors’ demand for very long-term maturities may be waning, which could hamper a further narrowing. At the same time, the losses on the equity markets yesterday may signal that risk aversion might increase again ahead of the start of the US earnings season this evening. Today, Ireland will also present its new budget plans.
With regard to the ECB monetary policy, the ECB yesterday published its monthly MFI interest rate statistics for the month of February. These once again showed a substantial reduction in interest rates charged on loans to both households and non-financial corporations. The decline in interest rates indicates that the monetary transmission mechanism in the euro zone isn’t completely broken and does question the need for the ECB to introduce dramatic non-standard action. At last week’s ECB policy meeting, Trichet has said that the council ‘intends to take further non-standard decisions’ at their next policy meeting in May, but declined to give any further details. Comments of ECB governing council members have pointed in the direction of an extension of the refinancing operations beyond the current maturity of 6 months as well as the purchasing of private debt securities in the secondary market. Today, the head of the Portuguese central bank, Constancio, will speak.
On the money market, the ECB will hold its weekly refinancing operation. Notwithstanding, last week’s smaller than expected rate cut, the Euribor fixings on 1, 3 and 6 months have continued their decline, as the liquidity spread continues to narrow.
Regarding trading, German bonds recouped much of their opening losses on the back of profit-taking seen in the equity markets. As such, the Bund didn’t confirm the break below the previous reaction low at 122.11, but is nevertheless still below the neckline of a short-term double top at 122.54. The Bund should recoup this level to improve the short-term technical outlook. A sustained fall below the 122.11 level on the other hand would raise the odds for a test of the contract low at 120.37, which would also correspond with the targets of the double top formation. Therefore, these levels look ideal to install new long positions. At the short end of the curve, we see current levels in the Schatz and 2-year German yields as interesting to install new long positions, but are looking first for signs that the correction is running out of steam.
In the US, the technical picture of the T-Note future has also deteriorated following the fall below the neckline of a double top formation at 122-24. Here, much attention will go out to the upcoming supply with today a 10-year TIPS auction and the start of the earnings season.
In the UK, Gilts underperformed the German bond market yesterday, as the offer/ cover ratio in the Bank of England’s repurchase operation was a high 3.65. This means that the BoE received 3.65 as much offers than the £2.5B of Gilts it bought.
Today, the calendar contains the February industrial production data. In March, industrial production is forecasted to show the twelfth consecutive monthly contraction. The consensus is looking for a decline by 1.2% M/M in February after falling by 2.6% M/M in January. Especially the manufacturing sector is forecasted to show weak performance, falling by 1.5% M/M.
On the supply front, the DMO will tap its 10-year Gilt 4.5% 2019 for an amount of €3B. At its previous tap, demand has been quite low with a bid/cover of 2.06 and a large tail of 1.8 basis points. The auction results will be closely monitored following recent disappointing 40- and 30-year Gilt auctions.
In the framework of its asset purchase facility, the Bank of England will offer to buy £158M of corporate bonds today.
