Markets: Fixed Income
On Thursday, global bonds couldn’t extend their recent rebound and fell again towards the recent lows, as European and UK central bankers signalled they have done enough for now and US equities staged a late rebound. The US eco data con-tributed to the bearish sentiment on bond markets, as initial claims fell for the third consecutive week, while continuing claims also showed some first signs of topping out. This raised market expectations that today’s US Payrolls report may not be as bad as feared and helped equities to move higher. Supply pressures and the mort-gage related selling were a negative factor too. The US Treasury announced that it will raise $65B via next week’s 3, 10 and 30-year auctions, while the sustained rise in mortgage rates caused more mortgage related selling.
In the US, 5-year yields rose to new highs at around 2.60%, while 10-year yields tested again the recent highs at 3.75%. In the euro zone, the short end of the curve was hit the hardest, as there was still some profit-taking on the recent steepening of the yield curve. German 2- and 5-year yields rose by respectively 12.2 and 10.5 basis points, while 10- and 30-year yields rose by respectively 6.5 and 4.8 basis points. Despite the positive sentiment, the intra-EMU sovereign spreads widened yesterday, as the concerns about Latvia brought the creditworthy of other European Union member states again to the forefront.
Payrolls come at crucial time for bonds
Today, all eyes will be on the US payrolls report. Last month, the Payrolls report showed some easing in the number of job losses. Employment dropped by 539 000, compared to 699 000 in March. For May, the consensus is looking for a decline in employment by 520 000, which is broadly in line with Wednesday’s ADP report. Therefore we have no reason to distance ourselves from the consensus. However, the ADP employment report came as a disappointment to many investors as the pre-vious figure was significantly downwardly revised (-545 000 from -491 000) and also the May figure came out somewhat lower than expected.
On the ECB front, ECB President Trichet and executive council member Stark will participate at the international conference on the occasion of the 20th anniversary of socio-economic transformations carried out in Poland and other Central and East-ern European countries. Following yesterday’s ECB monetary policy meeting and press conference, we don’t expect to move the market. Nevertheless, comments on the precarious situation of Latvia, where speculation about a devaluation of the Lat has mounted this week, may be interesting to watch.
At yesterday’s monetary policy meeting, the ECB governing council didn’t an-nounce any additional monetary policy initiatives, as they kept the main policy rate unchanged at 1% and called interest rates ‘appropriate’, which indicates that no rate change should be expected anytime soon. The details of the covered bond plan didn’t contain any surprises neither, as the amount of €60B was confirmed. The new ECB staff projections for growth and inflation were also in line with expectations and did suggest that monetary policy can remain very easy, as the headline inflation rate is expected to remain way below the 2% over the coming two years.
Regarding trading, following yesterday’s sell-off, bond markets are again at crucial levels ahead of today’s US Payrolls report. Indeed, both in the US and in Germany 10-year yields are again close to the recent highs at respectively 3.75% and 3.68/70%. This is also the case for the equity markets, where the S&P closed at around the year highs. A sustained break higher in both the equity markets and in bond yields would suggest that the era of low longer-term yields is over and that we were heading for a V-shaped recovery. As long as we are still below these crucial levels, we hold on to our long bond positions, but keep tight stop loss protec-tion.
In the UK, the calendar contains the PPI data, which are forecasted to extend their recent decline in May. Most attention will go out to the core output PPI to see whether a more broad-based reduction in inflationary pressures is emerging, as the recent decline was still mainly due to the drop in commodity prices.
