Markets: Fixed Income
On Monday, global equities rallied higher and broke above first key resistance levels amid thin trading conditions, due to the closing of UK and Japanese markets. Positive sentiment on global markets put government bonds again under pressure, especially in Europe, where bonds had lagged the recent downmove in the US. Treasuries were also down on the better than expected US eco data and the strong opening of the equity markets, but US Treasuries recouped the losses later on in the session when the Fed purchased a larger than expected $8.5B of US Treasuries maturing between 29/2/2016 and 15/02/2019. The large purchase may indicate that the Fed isn’t willing to let longer-term yields move much higher.
Curve-wise, there was some profit-taking on the recent steepening of the US yield curve, as 2-year yields rose by 3.2 basis points compared to a decline of 2.2 basis points in 30-year yields. In the euro zone, German yields rose quite sharply. 2- year yields outperformed with a rise of 5.9 basis points, but 5-, 10- and 30-year yields rose by respectively 8.7, 7.3 and 8.8 basis points. German 30-year yields ended the day just below the 4% mark. Other European bond markets outperformed the German bond market, as the intra-EMU sovereign spreads narrowed sharply yesterday on the increase in risk appetite.
German bonds underperform
Today, the calendar contains the euro zone PPI figures (March) and nonmanufacturing ISM (April). Euro zone PPI is expected to come out at -2.9% Y/Y in March (from -1.8% Y/Y), but the data are rather outdated and therefore, no market impact is expected. In the US, the non-manufacturing ISM is forecasted to improve from 40.8 to 42.0 in April following an unexpected decline in March. We believe the risks might be on the upside of expectations after the upward surprise in the ISM manufacturing index last Friday. Nevertheless, seasonal adjustment factors related to the timing of Easter may have a negative impact on the series.
On the supply front, Austria will tap both the 5- and 10-year sector today for an amount of respectively €0.88B and 1.045B. The increase in risk appetite on global markets has also been reflected in a sharp narrowing in the intra-EMU sovereign spreads over the past months, as investors are increasingly looking for some yield pick up. This should also support today’s auction, despite the negative net cash flows this week and the sharp deterioration of the public finances.
Yesterday, the EU Commission released its spring forecasts, which contained another sharp downward revision of the growth outlook for the euro zone for this and next year from respectively -1.9% and 0.4% to -4.0% in 2009 and -0.1% in 2010. The quarterly growth profile however indicated that the euro zone economy would start growing again from the second quarter of 2010 onwards. This however cannot prevent the euro zone public deficits from tripling from -1.9% of GDP in 2008 to -5.3% this year and -6.5% next year, double the Maastricht criteria of 3% of GDP. The euro zone public debt of GDP ratio is also forecasted to rise further above the 60% mark to 77.7% in 2009 and 83.8% in 2010. The substantial deterioration of the public finances however suggests that any economic recovery may be slower than in previous economic cycles.
Regarding trading, German bonds sold off yesterday on the back of the strong gains in the equity markets. Both the European and US equity markets thereby broke above first key resistance levels, which improves the technical outlook for equities. Although German bonds underperformed sharply yesterday, the Bund is still within its recent sideways range between 123.47 and 121.61. This in contrast to the US Treasury market, where the US T-Note and Long bond futures have broken below the neckline of a double top formation on the back of last week’s Fed statement, where the Fed left the amount of Treasury purchases unchanged at $300B. Yesterday’s larger than expected purchase of 8.5B however suggests that the Fed isn’t willing to let longer-term yields drift still higher. This afternoon, Fed’s Bernanke will testify, while the Treasury will auction a 3-year Note for an amount of $35B. For now, we continue to play the recent ranges, which means that we would only install long positions in case of a test of the contract lows in the Bund at around 120.37.
In the UK, the calendar is as good as empty today.
