Markets: Fixed Income
On Wednesday, global bonds gained further ground, but closed off the intraday highs, as US equities showed some resilience despite the downgrade by S&P of 22 US banks. Asian and European equity markets had a more difficult session, which supported the government bond markets during the morning session. The release of the lower than expected US CPI data provided another boost to the bond markets. This boost however petered out, once US equities rebounded to close the session almost unchanged. Along with some profit-taking following the huge gains over the past days, this pushed US Treasuries off the intra-day highs.
In a daily perspective, the short end of the curve outperformed both in the US and the euro zone. In the US, 2-year yields fell by 2.4 basis points, while 10- and 30- year yields rose by respectively 2.9 and 3.7 basis points. In the euro zone, German yields were down across the yield curve, as German yields still had to catch up with overnight decline in US yields. German 2-year yields were down by 6.6 basis points and 10-year yields by 4.4 basis points. The intra-EMU sovereign spreads widened again reflecting the decrease in risk appetite.
Spanish 30-year bond auction in the focus
Today, the euro zone data calendar is empty, but in the US, the Philly Fed (June), leading indicators (May) and weekly claims are scheduled for release.
Earlier this week, the NY Fed deteriorated somewhat after the sharp improvement in the previous two months. The Philly Fed however is expected to extend its rebound in June. The consensus is looking for an improvement from -22.6 to -17, but the risks might be on the downside of expectations after the disappointing NY Fed and due to the plant shutdowns by GM and Chrysler. Initial claims are forecasted to have stayed broadly unchanged in the week ended June 13 (602 000 from 601 000), confirming the recent stabilization in initial claims. Continuing claims, on the contrary, are forecasted to extend their upward trend (6 840 000 from 6 816 000) in the week ended June 6. US leading indicators are expected to show the second consecutive increase in May.
On the supply front, France will issue a new 5-year BTAN, as well as tap two other BTANs and two linkers for a total amount of between €8.2-10.2B, while Spain will tap its 30-year benchmark for an amount of €0.75-1.25B. Especially the Spanish auction will require close attention following recent awful housing data and warnings about the outlook for public finances. Yesterday’s German Schatz auction was in line with previous auctions with a bid/cover ratio of 1.9 and the Bundesbank retaining €1.42B for its own market operations. In the US, the Treasury will detail next week’s 2-, 5- and 7-year auctions.
Outside the euro zone, the Swiss National Bank will hold its monetary policy assessment. With the policy rate target at 0.25%, no rate change is expected. We also expect the Swiss National Bank to confirm its aggressive monetary policy and to continue purchasing corporate and covered bonds as well as preventing a further appreciation of the Swiss franc.
Regarding trading, yesterday government bonds continued to perform well supported by favourable US inflation data and a weak performance of the Asian and European equity markets. Bonds however closed off the intra-day highs, as the US equity markets showed some resilience despite the downgrading of 22 US banks. Nevertheless, the failure to break above the year highs in the S&P and the correction afterwards suggests that investors have become worried that markets have run ahead of themselves during the rally over the past three months.
The decrease in risk appetite is of course supportive for the safe haven government bond markets, but given current overbought conditions, some short-term correction shouldn’t be excluded. From a technical point of view, the Bund confirmed the break above a short-term double bottom formation with neckline at 119.31, which suggests that the rebound has further way to go. The obvious target of the current rebound is the 3.40% level in German 10-year yields (neckline longer-term double bottom formation). In the US, the T-Note future however still failed to break above 115-06+ (previous break down), which would have improved the short-term technical outlook for the US T-Note future too.
In the UK, the calendar is again well-filled with the May retail sales, the public sector lending data (May) and CBI industrial trends survey (June). For June, the consensus is looking for the third consecutive increase in retail sales. Although a figure of 0.3% M/M is expected, we believe the risks might be on the downside of expectations after the CBI distributive trades survey. The CBI industrial trends survey is expected to show a further improvement in total orders (in June), while UK public finances are forecasted to have deteriorated further in May.
