Markets: Fixed Income
On Monday, global bonds reversed Friday’s losses, as risk aversion flared up again on concerns about the outcome of the stress tests in the US financial sector. As such, equities failed to break above first key resistance and turned south led by profit-taking in the financial and the cyclical basic resources stocks. This may indicate that an economic recovery isn’t around the corner and that first some further stabilization will be needed. Commodities sold off too with oil plunging below 50 USD/barrel and the CRB index losing almost 9 points. Gold again benefited from its safe haven status and gained around 20 USD.
On the government bond market, there was a bull flattening of the yield curve. In the US, 2- year yields were down by 5.6 basis points compared to a decline by 9.6 basis points in the 5-year sector and 10.9 basis points in the 10- and 30-year sector. In the euro zone, yields fell even slightly more with 2-year yields down by 8.3 basis points, 5-year yields by 11.7 basis points, 10-year yields by 12.1 basis points and 30- year yields by 10.1 basis points. Increased risk aversion also put a halt on the recent narrowing of the intra-EMU sovereign spreads. Italian bonds underperformed ahead of the details of the Italian bond auction next week, which will be released tomorrow.
Bond markets still lack a clear direction
Today, the euro zone data calendar contains the German ZEW index (April) and Belgian consumer confidence (April). The German ZEW index is expected to jump back into positive territory in April for the first time since July 2007. Economic sentiment is expected to have improved slightly from -3.5 to 2.0, according to the current consensus, while the current situation is forecasted to drop to a new record low (-90 from - 89.4). Regarding the economic sentiment, we would put the risks on the upside, as the recent improvement in market sentiment may have had a positive influence on the analysts’ economic expectations. In the US, the calendar is almost empty as it only contains the weekly ABC consumer confidence indicator.
Outside the euro zone, the Swedish Riksbank will announce its rate decision. Most analysts expect a 50 basis points rate cut, but a larger cut cannot be excluded. This would lower the repo rate from 1% to 0.50%, which means that interest rates will have fallen close to zero. This raises the question whether the central bank should embark into quantitative easing and start buying government bonds and/or private sector securities (CP/corporate bonds). Until now, the Swedish central bank has preferred to work through the banking system via an extension of the refinancing operations and the creation of a temporary credit facility with commercial paper as collateral. In his latest speech at the end of March, governor Ingves held all options on QE open, but indicated that they will closely monitor the developments in the UK and the US to see ‘how well the unconventional measures taken by other central banks have worked’. Therefore, today’s decision of the Swedish Riksbank may provide some indication on the direction to which central bankers are moving and may as such shed some light on what we may eventually expect from the ECB at the beginning of May.
Yesterday, the governor of the Austrian central bank indicated that the discussion on the monetary policy path is still ongoing within the ECB governing council. Nowotny repeated that he’s in favour to leave the repo rate at 1% and that the purchasing of corporate bonds is under discussion. He however didn’t want to frontrun on the outcome of the discussions. Today, ECB’s Ordonez, Constancio and Papademos are scheduled to speak. Ahead of Thursday’s non-monetary policy meeting, we don’t expect any consensus on the measures, which could leave the impact of the comments limited.
On the supply front, Ireland will tap two bonds in the 5- and 9-year sector for a total amount of €0.75-1B. It’s the only European bond issuance scheduled for this week. As such, the positive net cash flow should support the issuance, but the recent downgrades of Ireland’s AAA rating by S&P and Fitch and Friday’s review for downgrade by Moody’s may weigh on investor’s demand.
Regarding trading, government bonds continue to trade quite volatile, but in the end, little has changed and bonds are still within recent trading ranges. In the Bund, this short-term trading range is seen between 121.61 and 123.14. We were looking to install new long positions in case of a test of the contract lows at 120.37, but the correction didn’t go that far. As such, we have a more neutral view on the outlook now. Besides the eco data, sentiment on the equity markets may prove again decisive for today’s trading. Yesterday, the European and US equity markets failed to break above first key resistance (S&P at 877). More profit-taking on the recent rally could lead to a break higher and bring the Bund under the positive influence of a double bottom formation with targets at 124.64/67.
In the UK, Gilts outperformed the German bond market following yesterday’s Bank of England’s reverse auction, which had a much lower offer/cover ratio of 1.38 compared to last week. This indicated that there was much less interest from investors to sell their Gilts and this supported the Gilt market.
Today, the calendar contains the March CPI inflation data. In March, CPI inflation is forecasted to drop below 3.0% Y/Y. The consensus is looking for an outcome of 2.9% Y/Y (from 3.2% Y/Y) and also core CPI, excluding food and energy, is forecasted to show a marginal drop (1.5% Y/Y from 1.6% Y/Y).
