Markets: Fixed Income
On Monday, global bond markets benefited from the safe haven flows caused by fears for a global pandemic, as swine flu cases spread from Mexico into North America and Europe. This could hurt the still very fragile global economy and endanger the recent signs of stabilization. Equity markets however kept up rather well and closed almost unchanged in Europe and only slightly lower in the US. Bond markets also benefited from a good start of the US refunding, as the 2-year Note auction was well bid. In the euro zone, the failure of Slovakia to tap its long-term bond failed to dent sentiment, as the Belgian auctions went very well.
In a daily perspective, the US yield curve shifted around 8 basis points lower, except in the 30-year sector that underperformed slightly and declined only by 5 basis points. The latter only happened after US 30-year yields had first set new recent highs at 3.90%. In the US, the Fed also purchased $7.025B of outstanding Treasuries maturing between 30/9/2013 and 15/2/2016. In Germany, yields declined by a more limited extent, but this was mainly due to the closing hour, as the European bond markets closed when equities were at their intra-day highs. German yields were down by 1.6 basis points in the 2-year sector, 2.5 basis points in the 5-year sector and 3.1 basis points in the 10-year sector. The 30-year sector also underperformed with a decline of 1.2 basis points.
Slovakian bond auction fails, but doesn’t damp sentiment
Today, the euro zone calendar contains the German CPI data (April) and Italian business confidence (April). In March, German consumer price inflation dropped from 1.0% Y/Y to 0.4% Y/Y, but is expected to rebound in April. German CPI (EU Harmonized) is forecasted to come out at 0.8% Y/Y in April, according to the preliminary figure. The uptick might be due to volatility linked to the timing of Easter and the 0.3% M/M decline in CPI (April) last year, which falls out of the calculation. Over the summer, inflation is still expected to turn (temporarily) negative. Italian business confidence is forecasted to rise from 59.8 to 61.3 in April.
In the US, the calendar is well-filled with the S&P Case Shiller house prices (February), Conference Board consumer confidence (April) and the Richmond Fed (April). In February, the decline in S&P Case Shiller home prices is expected to slow somewhat. The consensus is looking for an outcome of -18.7% Y/Y (from -18.97% Y/Y). Conference Board consumer confidence is expected to show the second consecutive improvement in April (29.5 from 26.0) and we believe the risks might be on the upside of expectations after the upward surprises in both Michigan and ABC consumer confidence. The Richmond Fed is forecasted to extend its upward trend (-17 from -20) in April, as the NY empire state and Philly Fed survey surprised already on the upside earlier this month.
On the supply front, the Netherlands and Italy will tap the market today. The Netherlands will tap three different bonds from the very short end (1 year) to the very long end (20-year) for an amount of between €0-2B. Italy on the other hand, will tap two different inflation-linked bonds in the 10- and 14-year sector. The inflationlinked bonds from Italy and the short-term bonds from the Netherlands should pose no major problems, but the long end still remains a more difficult hurdle. Yesterday, Slovakia for example failed to attract enough bids for their 20-year bond auction and had to cancel the whole auction. Over the past months, the UK also had seen already some problems to sell very long bonds. Belgium yesterday however sold €3.501B of three different bonds, of which the largest part in the longest maturity (10-year).
On the ECB front, ECB’s Bini Smaghi will speak on ‘conventional and nonconventional monetary policy’ this evening. His speech may prove very interesting given the current debate on the non-conventional measures the ECB will announce at their next policy meeting, at the beginning of May. Until now, most policymakers have focused on the extension of the refinancing operations from six months up to one year combined to an explicit timeframe over which the ECB expects to keep short-term rates at virtually zero (in line with what the Bank of Canada and the Swedish Riksbank did last week). The possibility of a purchase of private debt securities has moved a bit to the background, as the influential German Bundesbank president Weber indicated that the unconventional measures should continue to focus on the banking sector, which plays a very important role in the financing of the European economy. It’s however not excluded that the ECB will also announce to purchase CP and/or corporate bonds to ease financial conditions on capital markets, but the purchasing of governments bonds still looks no option. Yesterday evening, ECB president Trichet declined to give any further details on the non-conventional measures, and said that the governing council ‘has agreed not to give any further indications but will, on 7 May, provide all the necessary information on anything that is decided’.
Regarding trading, government bonds moved again higher in the range on increased risk aversion related to the outbreak and spreading of swine flu. Overnight, the WHO raised the level of influenza pandemic alert from the phase 3 to 4. Along with some reports that Bank of America and Citi may need to raise more capital, this weighs on investors’ sentiment and pushed Asian equities lower this morning. This also resulted in a higher opening of the Bund this morning. A break above 123.47 in the Bund would improve the short-term technical picture. Whether such a break will occur also depends on the equity markets, where the S&P500 is still close to the 877 level, and the digestion of supply, as the US Treasury will hold a 5-year Note auction.
In the UK, the calendar contains the CBI distributive trades report (April). In March, the CBI distributive trades report showed a plunge in sales after improving in February. For April, a slight improvement is expected.
On the supply front, the DMO will tap its long-term 4% 2022 Gilt for an amount of €3B. Following last week’s budget announcement, this will be the first major test for investors’ appetite for longer-term Gilts. As mentioned above, over the past months, the longer-term auctions in the UK haven’t gone always that well.
