Markets: Fixed Income
On Wednesday, global bonds closed moderately higher in a choppy trading session.
Intra-day, bonds started the day on strong footing, as European equities opened lower on the back of the overnight losses in the US and the weaker than expected earnings of Alcoa. Equities however rebounded during the European and US session, as the auto builders surged following the German government decision to triple the amount for its scrap premium from €1.5B to 5B. In the US, reports that the Treasury was planning to extend the TARP to certain life insurers supported the sector. The rebound on the equity markets sent bonds somewhat lower. During the remainder of the session, there was some choppy trading activity on the back of a successful UK reverse auction, a disappointing US reverse auction, a successful 3-year Note auction and the dovish Minutes from the Fed, which showed a downward revision of the staff projections for GDP in the second half of 2009 and 2010.
In a daily perspective, there was a flattening of the US yield curve, as 2-year yields rose by 1.6 basis points compared to a decline of 2 basis points in 5-year yields, 4 basis points in 10-year yields and 4.6 basis points in 30-year yields.
In the euro zone, the short end outperformed, as 2-year German yields declined by 3 basis points compared to 0.9 and 0.3 basis points in 5- and 10-year German yields. The 30-year sector outperformed too with a decline of 1.5 basis points. Overall, the intra-EMU sovereign spreads widened slightly, especially in Ireland where the new budget couldn’t prevent a rating downgrade by Fitch. The 10-year yield spread over Germany widened by 9 basis points. Greece on the other hand outperformed with a decline in the spread of 5 basis points.
Bund confirms break below double top formation
Today, the euro zone data calendar contains the German and Italian industrial production data (February) and the final figure of German CPI (March). In January, German industrial production showed the sharpest monthly drop since the start of the series in 1978. The breakdown showed that weakness was extremely severe in the manufacturing sector. For February, the consensus is looking for less awful outcome (-3.0% M/M) as the scrap bonus increased domestic demand for cars. The drop in Italian industrial production was more moderate last month. In Italy, industrial production dropped by 0.2% M/M in January and for February, a decline by 1.5% M/M is forecasted.
In the US, the calendar contains the February trade balance and weekly claims. The US trade deficit is expected to stay unchanged at -$36.0B in March as both imports and exports are forecasted to have declined, which is usually the case in periods of recession. Initial claims are likely to stay around the 660 000 level, while continuing claims are forecasted to extend their upward trend (to 5 800 000 from 5 728 000).
Much attention will also go out to supply, as Italy, Slovakia and the US will all tap the market today. Italy will tap four different BTP’s in the 4-, 10-, 14- and 20-year segment for a total amount of €6.25-9.5B, while Slovakia will tap two different bonds in the 4- and 8-year segment for an unspecified amount and the US will conclude this week’s auctions with a tap of the 10-year Note for an amount of $18B. Yesterday, Portugal sold €1B of its 3-year OT 5% June 2012, which was slightly more than announced.
On the ECB front, the ECB monthly bulletin may be very interesting this month, as it may provide some insight into the debate on the additional non-standard measures the ECB governing council intends to take at their next policy meeting in May. These currently focus on the lengthening of the refinancing operations to beyond 6 months and/or the purchasing of private debt securities. The purchasing of government bonds appears to be no option for now. Yesterday, ECB’s Executive Board member Stark again stressed the dominant role of the banking sector as regards the financing of the European economy, although he admitted that market financing has increased over the last couple of years. He also added the German or European banking system still works well and urged not to forget that the current crisis started in the unregulated market segments. This suggests that the ECB still stands cautious against the idea of improving lending conditions via the purchasing private debt securities. The governor of the Greek central bank, Provopoulos, on the other hand, said in a speech on the global economy that ‘the reduction in base interest rates has not translated fully into lower interest rates for households and businesses, because banks have adopted stricter lending standards’.
Regarding trading, German bonds opened higher yesterday on the back of the equity weakness, but continued to slide gradually lower during the session once equities rebounded. As such, the Bund tested again the neckline of the double top formation at 122.53, but failed to break again above in a sustainable manner. This morning, the Bund opens sharply lower on the better sentiment in the equity markets and is again below the previous reaction low at 122.11. A sustained break below 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, we would wait on these levels before installing new long positions. The short end of the curve continues to outperform now that the disappointment on last week’s ECB rate decision has waned. We continue to favour an outperformance of the short end and consequently look for a steepening of the German yield curve.
In the US, the T-Note future also re-tested the neckline of its double top formation at 122-24, but also here we failed to break above. As such, the short-term technical picture remains bearish. In Japan, yields continue to rise this morning on reports that Japan is considering a larger than expected stimulus package.
In the UK, Gilts outperformed the German bond market on the back of the results of the BoE Gilt purchases, which showed a low offer/cover ratio of 1.87 and a strong inflation-linked Gilt auction. Today, the eco calendar contains the March PPI data and February trade balance. In March, PPI data are expected to show an uptick as commodity prices increased. The trade deficit is forecasted to have contracted in February with both imports and exports showing a decline.
The Bank of England rate decision is likely to be a non-event, as we don’t expect any changes to the rate or the asset purchase programme. Therefore, we’ll probably have to wait until the publication of the Minutes to get a first assessment on the asset purchases. Today, the BoE announced that it will offer to buy £298M of corporate bonds.
