Markets: Fixed Income
On Thursday, global bonds traded somewhat lower within recent ranges, as equities recouped their early losses and extended their rally higher. Investors continued to focus on the signs of recovery and ignored the weak eco data, like the record drop in euro zone industrial production, record high continuing claims and the sharper than expected decline in the housing starts. Positive news however came from the Philly Fed survey, which in line with the NY Empire State Manufacturing Survey, showed some improvement in business sentiment. Better than expected earnings from JPMorganChase added to sentiment that the financial sector had finally turned the corner, which had been seen as a conditio sine qua non for an economic recovery.
In the US, yields rose between 5-7 basis points across the yield curve, while in the euro zone, German yields were up more than 3 basis points expect in the 30-year sector where yields were only up by 1.1 basis points. The intra-EMU sovereign spreads benefited from the increased risk appetite and narrowed further.
Bonds locked in tight sideways range
Today, the calendar contains the euro zone trade balance (February) and in the US, University of Michigan consumer confidence (April) is scheduled for release. In January, the euro zone seasonally adjusted trade balance showed a sharp widening in the deficit (5.5B from 1.7B), as the decline in exports outweighed the drop in imports. For February, the consensus is looking for a marginal narrowing of the trade deficit (4.9B) as the decline in exports might be milder than the contraction in imports. In April, Michigan consumer confidence is forecasted to show another slight improvement in sentiment (58.5 from 57.3). In the coming months however, consumer confidence is expected to remain fragile as mounting job losses put a drag on consumers’ sentiment.
On the supply front, there are no auctions scheduled today. Yesterday, both the French and Spanish auctions went quite well. This added to overall positive sentiment on the credit markets and the intra-EMU spreads continued its recent narrowing trend.
This morning in Japan, ECB president Trichet repeated that the ECB must do everything possible to restore confidence, ‘which is the most precious ingredient in the present circumstances’. Just like yesterday’s comments from ECB’s Liikanen and Gonzalez-Paramo, Trichet’s speech however failed to provide more insight in the non-conventional measures the ECB governing council intends to announce at their next policy meeting in May.
Regarding trading, government bonds show little directional movement, as bonds are currently squeezed between the prospect of a prolonged period of low policy rates and the signs of an economic recovery. In the Bund, only a break above 123.14 on the upside or below 121.61 on the downside would give some indication on the next move. Currently, the equity markets are in the driver’s seat and a sustained break above the previous highs at 877 in the S&P500 would further improve investor’s risk appetite and put government bonds under pressure. Therefore, today’s earnings results from Citigroup and General Electric may set the tone for today’s trading both on the equity and the bond markets. Following the better than expected earnings from Goldman Sachs and JP Morgan Chase, Citigroup may have difficulties to surprise the market in a positive sense, therefore more attention will likely go out to General Electric, which can be seen as a bellwether for the industrial sector. Overall, we do expect more sideways trading on the bond market today.
In the UK, Gilts outperformed the German bond market without any specific driver. The very small purchases of corporate bonds, yesterday the Bank of England bought only £10M, nevertheless do suggest that the overall majority of the 75B of purchases will be done in Gilts, which is of course a supportive factor for the Gilt market. Yesterday’s rather strong 5-year Gilt auction also added to the positive sentiment.
Today, no data are on the calendar.
