Markets: Fixed Income
On Tuesday, global bond markets lacked strong direction, as the eco calendar was devoid of market-moving data and as long as it is not clear whether the equity and commodity markets will break above key technical resistance. Indeed, both the S&P500 and the CRB index are still close to but below the January highs. Yesterday, equity markets retreated slightly from the recent highs, but the CRB index extended its recent gains, as oil set a new recent high at 60 USD/barrel. Intraday, bonds traded up and down on the movements in the equity markets, but closed little changed in the end.
In a daily perspective, US yields were broadly unchanged, but were still somewhat higher in the euro zone, where both German 10- and 30-year yields closed at key technical resistance at respectively 3.4% and 4.2%. In the US, the Fed purchases of $6.007B of Treasuries maturing between 31/5/2012 and 15/8/2013 had no immediate impact on trading. In the euro zone, the intra-EMU sovereign spreads widened for the second day in a row, which may indicate that risk appetite is waning a bit.
Bund still close to key support at 120.37
Today, the calendar heats up with the euro zone industrial production figures (March), US retail sales (April) and business inventories (March). In March, euro zone industrial production is forecasted to have dropped by 1.0% M/M, the eleventh consecutive monthly decline. We don’t have a clear view on the risks as regional production figures showed a mixed picture with German industrial production flat, while Italian and French IP surprised on the downside of expectations. In the US, retail sales are forecasted to come out flat in April, after coming out weaker than expected in March. We believe the risks might be on the upside of expectations due to the timing of Easter. US business inventories are forecasted to show the seventh consecutive decline in March (-1.1% M/M). A substantial decline in the inventory/ sales ratio may indicate that the inventory cycle is turning.
On the supply front, Portugal will tap its 4.95% October 2023 for an amount of €0.75B. Yesterday, the bond already underperformed slightly ahead of today’s auction. Although recent auctions have gone rather well in the euro zone, longer-term auctions may still prove more difficult to sell.
On the ECB front, ECB’s Weber will speak this evening in London on ‘reflections on the financial crisis’. We don’t expect him to break new ground, as Weber already spoke yesterday afternoon in Munchen on the financial crisis. There, he strongly defended the focus of the ECB’s unconventional measures on the banking sector, given its primordial role in the financing of the euro zone economy. As such, he stressed that the ECB’s decision to purchase covered bonds is not just printing money (Quantitative easing), but intends to ease the financing conditions of banks as well as corporates (Credit easing). Hence, Weber concludes that given the fact that there is no credit crunch in the euro zone, there is no need to circumvent the banking sector by buying more private-debt securities.
On the money market, the ECB will hold a six-month refinancing tender today. As usual, this tender will be executed with full allotment and at a fixed rate equal to the main refinancing rate at 1%. These favourable conditions should ensure that the rate cuts are transmitted into the real economy. Monday’s MFI interest rate statistics for the month of March indicated that this policy has been successful in reducing the financing costs for companies and households.
Regarding trading, German bonds couldn’t benefit yesterday from the decline in the equity markets. As such, the Bund remains close to key support levels at 120.37. A sustained break below would not only deteriorate the short- but also the longer-term technical picture. Although we don’t favour such a break lower, the break lower in the US Treasury market has indicated that the risks for longer-term bonds have shifted from the upside to the downside. This is why we now prefer a sell-on-upticks instead of a buy-on-dips approach at the longer end of the curve, even while new longs can be considered from a speculative point of view. In the short-term, the direction on the bond markets is likely to go hand in hand with the direction on the equity markets and their ability to break above the January highs (at 943 in the S&P500).
In the UK, Gilts traded in line with the German bond market, despite a temporary boost from a strong Gilt auction. Indeed, the £2.25B tap of the 4.75% December went very smooth with a bid/cover ratio of 2.24 and a tail of only 0.4 basis points compared to respectively 1.37 and 1.8 at the previous auction in November last year.
Today, the Bank of England will release its quarterly inflation report. This is likely to indicate that inflation will remain below the 2% target in the medium term, as the MPC last week decided to increase the asset purchase programme by £50B to 125B. To retain its inflation credibility the Bank of England will however have to stress their exit strategy once the economy recovers.
On the supply front, the Bank of England will hold a reverse auction of Gilt issues maturing between September 2014 and March 2019 for an amount of £3B.
