Markets: Fixed Income
On Friday, global bonds erased early gains and ended the day lower, as end-ofweek profit-taking kicked in following some better than expected US data. During the morning session, the dramatic decline in Eurozone economic activity, where GDP shrank by 2.5% Q/Q in Q1, still supported bond markets. Bond markets couldn’t however hold on to these gains, as the sharp rebound in the NY Empire State Manufacturing Survey for the second month in a row raised optimism that the worst maybe behind us. At the same time, the core inflation rate came out higher than expected suggesting that the recent deflationary fears may have been exaggerated, although headline inflation fell further into negative territory. In response, it was mainly the longer end of the curve that bore the brunt. The decline on the bond markets halted once the equity markets fell lower too, but bonds nevertheless closed near the intraday lows.
In a daily perspective, US yields were up by around 1 basis point in the 2-year sector and by 4 basis points over the rest of the yield curve. In the euro zone, German yields were higher too, despite the dismal GDP data. German bonds even underperformed their peers, as the intra-EMU spreads narrowed slightly on Friday for the first time in the week.
German 10-year yields confirm sideways range
Today, the calendar is rather thin as it only contains the euro zone trade balance (March) and NAHB housing market index (May). In February, the euro zone trade balance showed a sharper than expected contraction in the deficit as imports dropped slightly, while exports showed an unexpected increase. In March however, exports are forecasted to decline again. The NAHB housing market index is forecasted to improve further (from 14 to 16) in May. Tomorrow, we will receive more data on the US housing market with the housing starts and permits. In February, both housing starts and permits showed some improvement, but it appeared only shortlived in March. For April, the consensus is looking for a slight rise in both housing starts and permits. On Thursday, the Philly Fed is forecasted to extend its improvement in May (from -24.4 to -18.0), but a better outcome is not excluded after Friday’s NY Fed. Also in the euro zone, the business confidence indicators for the month of May are scheduled for release. Tomorrow, the German ZEW index is expected to extend its upward trend after becoming positive in the previous month and on Thursday also the euro zone PMI’s are forecasted to improve further.
On the supply front, Belgium will tap three different OLOs today in the 5-, 6- and 10-year sector for an amount of between €2.2-2.7B. Later on this week, Ireland (5- and 10-year sector), Germany (new 10-year Bund), France (2- and 5-year sector) and Spain (23-year sector) will sell bonds too. As there are no redemptions scheduled, the net cash flow will be highly negative, which may weigh on demand. Last week, the intra-EMU sovereigns widened again for the first time in several weeks, which may signal that the recent narrowing may have run its course.
On the ECB front, ECB’s Weber will speak again today. Over the weekend, Weber repeated that interest rates are ‘appropriate’ and that the purchase of €60B covered bonds should be ‘sufficient’ for now. Weber’s comments have contrasted with other comments from ECB’s Sramko and Kranjec who suggested that the purchase of covered bonds was just the beginning. The divergent comments from the ECB may be a positive for the European bond market, as it may keep hopes alive that the ECB in the end may also decide to buy government bonds.
Regarding trading, investors’ sentiment with regard to government bonds has improved over the course of last week, as the rally on the equity market halted and some eco data (US retail sales) surprised on the downside. As such, German 10-year yields failed to break above the year highs at 3.4% in a sustainable manner. Hence, the sideways range between 2.9/3% and 3.4% is still intact. A fall below 3.28% (previous reaction high) would suggest that the recent upward pressure in yields is further abating. As such, new long positions may still be considered.
In the UK, the Rightmove house price index showed house prices rising for the fourth month in a row in May, this time by 2.4% M/M. On a yearly basis, house prices are however still down by 6.2%. The figures follow a series of better than expected eco data in the UK, which do suggest that the UK recovery may come sooner rather than later.
Today, the Bank of England is expected to purchase £3.5B of Gilts maturing between 2020 and 2032. The lower the offer cover ratio the better for the Gilt market.
