Markets: Fixed Income
On Tuesday, global bonds moved gradually lower throughout the session as concerns about a global flu pandemic and the stress tests in the US were offset by stronger than expected US consumer and business confidence data and technical selling ahead of this evening’s Fed decision. Hence, the slight decline on the US equity markets as well as the rather well received 5-year Note auction failed to support the US Treasury market. As a result, longer-term US yields rose sharply and broke above key technical resistance levels at 3% in the 10-year sector and at 3.85% in the 30-year sector. The break higher puts the Fed under pressure to raise the amount of Treasury purchases from the current level of $300B when they meet this afternoon.
In a daily perspective, there was a huge bear steepening of the US yield curve, as 2-year yields were up 7.1 basis points compared to 12.5 basis points in the 30- year sector. In the euro zone, yields closed still lower in the cash market, but this was completely due to the earlier closing hour and is likely to be reversed this morning. The intra-EMU sovereign spreads showed more signs of stabilization following the recent impressive downward correction.
German yields track US yields higher this morning
Today, the calendar is well-filled both in the euro zone and in the US. In the euro zone, the European Commission confidence indicators (April), M3 figures (March) and Belgian Q1 GDP and CPI are scheduled for release. Last month, the European Commission economic confidence indicator plunged to a new record low (64.6), while a stable outcome was expected. For April, a marginal improvement is forecasted (65.6 from 64.6), but we believe the risks are on the upside of expectations after the better than expected confidence indicators released earlier this month (PMI, ZEW; IFO). M3 money supply and credit growth is expected to have slowed further in March (5.7% Y/Y from 5.9% Y/Y). The credit growth data might be an important input in the current debate whether the ECB should continue to focus its efforts on the banking sector or if they should go via the capital market to improve credit conditions in the euro zone. In an academic speech on unconventional monetary policy, ECB’s executive board member Bini Smaghi again urged caution with regard to the purchasing of both government as well as corporate debt. Although, Bini Smaghi stressed that his comments only reflect his own opinion, they suggest that the ECB may hold back from buying securities on the secondary market when they announce their unconventional measures next week.
In the US, the calendar contains the advance figure of first quarter GDP, which is forecasted to show its third consecutive contraction. The consensus is looking for a decline by 4.7% Q/Q (annualized), softer than the 6.3% Q/Q contraction in the fourth quarter of last year. Both non-residential and residential investment are forecasted to show a significant negative contribution and also a faster pace of inventory liquidation is expected. Positive contributions are expected to come from household consumption and net exports.
On the supply front, Italy will issue a new 10-year benchmark for an amount of €4- 5.5B and tap its 3-year BTP (3B) as well as three CCTs (2.25-4B). Yesterday, the Italian linkers and Dutch bond auctions were well received. Today’s Italian auctions should also be supported by a positive net cash flow, given the redemption of an Italian bond worth €22B. Yesterday, the Greek Finance Minister indicated that Greece will increase its borrowing by €8B to 50B this year to protect the country against a possible new deterioration in the crisis. Greek bonds didn’t really underperform yesterday. Today, Germany is expected to revise down its growth forecasts from 2.25% to 6% of GDP. This will also increase the borrowing needs in Germany.
Regarding trading, European bonds moved gradually lower yesterday. As such, no break higher in the Bund above the previous highs at 123.47 occurred and the Bund is still within its recent sideways range between 123.47 and 121.61. In the US, yields moved sharply higher yesterday evening and thereby broke above the key resistance levels at 3% in US 10-year yields and 3.85% in 30-year yields. This increases the pressure on the Fed to raise the amount of Treasury purchases from the current level of $300B. We however doubt whether the Fed will raise the amount already at this meeting, as they purchased only $73B Treasuries up until this meeting, which means that they still have some room left. If the Fed leaves the amount unchanged, this may lead to some disappointment and push yields still higher, as supply concerns will continue to linger around. This evening, the Treasury will hold a 7-year Note auction for an amount of $26B and will announce the size of next week’s 3-, 10- and 30-year Note auctions which may amount to $73B. A sustained break higher in longerterm US yields may track also German yields higher ahead of next week’s ECB meeting and lead to a test of the downside of the recent trading range at 121.61.
In the UK, Gilts outperformed the German bond market after the long-term Gilt auction (2022) was well received with a bid/cover ratio of 2.25 and a small tail of 1 basis point.
Today, the Bank of England will purchase £3B of Gilts maturing between Sep 2014 and Mar 2018.
