Markets: Fixed Income
On Friday, global bonds put in a mixed performance, as US yields rose sharply ahead of this week’s massive supply and Fed meeting, while German yields fell lower. In both cases, the yield curve steepened, be it in a bearish and a bullish way. Hence, the stronger than expected German IFO indicator and rising equities failed to push German yields higher, which are still within recent sideways ranges. In the US, 10- and 30-year yields however tested the important resistance zone at around 3% and 3.85%. 30-year yields eventually closed at their highest level since November last year. This may put the Fed under pressure to increase the amount of Treasury purchases, which was set at $300B, when they meet on Wednesday evening.
In a daily perspective, US yields were up between 3.3 basis points in the 2-year sector and 8.9 basis points in the 30-year sector. In Germany, yields were down between 6.8 basis points in the 2-year sector and 0.2 basis points in the 30-year sector. The strong performance of German bonds was also reflected in the intra-EMU sovereign spreads, which stabilized or even widened slightly.
Bonds open higher on concerns about swine flu
Both in the euro zone and in the US, the calendar is thin today. Later this week, the euro zone calendar heats up with the M3 money supply and credit growth data, the European Commission confidence indicators and the flash CPI estimate. On Wednesday, M3 money supply and credit growth might be an important input in the current debate whether the ECB should continue to focus efforts on the banking sector or if they should go via the capital market to improve credit conditions in the euro zone. While last month, both the IFO and PMI’s showed some signs of improvement, the European Commission confidence indicator still plunged to a new cyclical low. For April, the consensus is looking for a slight improvement (65.7 from 64.6). On Thursday, the flash estimate of the April CPI is forecasted to show a slight increase (0.7% M/M from 0.6% M/M), but the German CPI figures (Tuesday) will give us a better indication about the risks.
In the US, the data calendar is even more exciting with the advance reading of first quarter GDP, the manufacturing ISM and conference board consumer confidence. In the first quarter, GDP is forecasted to show its third straight contraction. The advance figure is expected to show a decline by 4.7% Q/Q (annualized), slightly softer than the 6.3% Q/Q contraction in the fourth quarter of 2008. Consumer spending is expected to show a positive contribution, while a sharp negative contribution is forecasted to come from investments. Business confidence in the manufacturing sector is forecasted to have improved for the fourth consecutive month in April. The consensus is looking for an increase in manufacturing ISM from 36.3 to 37.8, as both the NY and Philly Fed came out significantly better than expected. Also conference board’s consumer confidence is expected to rise (29 from 26) in April. Again in the US, the Fed will hold its monetary policy meeting. No rate change is expected, but it will be interesting to see whether they’ll make some changes on their quantitative easing programme. Last time, the Fed surprised friend and foe with their purchase programme of $300B of US Treasuries.
On the supply front, Belgium and Slovakia will tap the market today. Belgium plans to sell €2.5-3.5B of three different OLO’s in the 2-, 6- and 10-year sector, while Slovakia will tap the very long end (4.5% May 2026). Over the past weeks, the intra- EMU sovereign spreads have narrowed sharply, as risk aversion declined. For a third week in a row, the net cash flows will again be positive, which may have contributed to the recent narrowing.
On the ECB front, ECB’s Trichet will speak in New York on ‘strategic trends in global finance’. Over the weekend, several ECB governing council members have spoken, but didn’t provide any more details on the non-conventional measures the ECB will take at their policy meeting at the beginning of May. Most members did however sound still quite pessimistic on the economic outlook, despite the recent improvement in several business sentiment indicators.
Regarding trading, government bonds traded quite volatile over the past weeks, but showed little directional movement. Therefore, a sustained break below or above the recent short-term range in the Bund between 121.61 and 123.14 is needed. This morning, German bonds opened substantially higher on concerns the outbreak of swine flu could delay the path towards an economic recovery. The impact is of course very difficult to gauge, but it may weigh on recent investor’s optimism and prevent equities from breaking higher and as such support bonds. In the S&P 500, 877 is still the key level to watch out for. In the US, markets will also look out for today’s 2-year Note auction, as US yields have risen close to important resistance levels, at least at the longer end of the curve.
In the UK, Gilts recouped part of last week’s sharp losses induced by the record budget deficit and borrowing needs, as Moody’s denied talks about a potential downgrading of the UK’s AAA credit rating.
Today, the Bank of England will publish a report on the asset purchase facility. This may be very interesting and could be market-moving, although we have no idea what will be in the report.
