Markets: Fixed Income
On Thursday, global bonds rebounded late in the session, as bond investors reacted relieved once the US 30-year Note auction was out of the way. While demand was strong, the bidding at the auction was again quite sloppy, as the auction stopped at 4.72% above the WI at 4.705%. In contrast to Wednesday’s 10-year auction, when investors reacted disappointed on the sloppy bidding, this time there was some relief, as this was the last auction for now. The next auction is only scheduled for June 23rd.
Earlier during the session, US 10-year yields had already tested again the 4% level, but failed to break above despite better than expected US retail sales and initial claims. This may signal that the 4% level remains a hurdle too high for now. Interestingly, bond markets ended the day with a trend reversal signal, while equities once again, failed to break decisively above the year highs. On the commodity markets, however, the rally continued.
In a daily perspective, the belly of the curve outperformed with US 10-year yields falling by 9.2 basis points compared to 3.2 basis points in 2-year yields and 6.9 and 6.5 basis points in 5- and 30-year yields. All yields tested the highs again at respectively 1.4%, 3%, 4% and 4.85% before reversing its course and leaving a bearish engulfing pattern on the screens.
In the euro zone, German yields were still higher at the official closing of the cash market. The rebound in the Bund afterwards points to a sharp decline in yields this morning. The intra-EMU sovereign spreads stabilized yesterday.
4%, a hurdle too high for US 10-year yields?
Today, the calendar contains the euro zone industrial production figures (April) and a first estimate of University of Michigan consumer confidence (June). In April, euro zone industrial production is forecasted to show the eighth consecutive decline, but the consensus is looking for a slowing in the pace of contraction. Markets expect to see a drop by 0.4% M/M, but the risks might be on the downside of expectations after the disappointing German and French industrial production data. Italian IP, on the contrary, came out somewhat higher than expected. US Michigan consumer confidence is forecasted to extend its upward trend in June. The consensus is looking for a slight improvement from 68.7 to 69.5. It will be interesting to keep a close eye on the current conditions sub-index, as the recent improvement was mainly driven by a recovery in the expectations component.
Besides the eco data, ECB president Trichet is scheduled to speak at the 130th anniversary of the Bulgarian National Bank in Sofia. Yesterday, the editorial of the monthly bulletin echoed last week’s introductory statement.
On the supply front, there are no auctions today. Yesterday, Italy sold €8.36B of government bonds, including a new 5-year benchmark. The sale fell just short of the upper end of the range at €8.75B. The underperformance ahead of the auction may have supported demand.
Regarding trading, yesterday bond yields failed to break above the recent highs both in the US and in Germany, despite the better than expected US retail sales and claims. Instead there was some relief on the bond markets, once the US 30-year Bond auction was out of the way. This may suggest that the rise in yields is running out of steam. In the US, the decline in yields left a bearish engulfing sign on the screens, which may point to some downward correction to come. But therefore, overall risk appetite should also deteriorate and this is currently not the case, even while the US equity markets are still struggling to break above the year highs. In Asia, the Nikkei closed above the 10 000 level this morning for the first time since October last year and also on the commodity market the rally continues. So as long as global market sentiment remains positive, the chance on a downward correction in yields remains remote, but yesterday’s session has nevertheless indicated that at least the upside in yields has become much more difficult too. This should also prevent German 10-year yields from breaking above the 3.70% level in a sustainable manner, which would have deteriorated the longer-term technical outlook for bonds.
In the UK, the eco calendar is empty, but BoE’s Fisher will speak on the UK and the global economic outlook, while BoE’s Dale will participate in a panel on inflation targeting.
