Markets: Fixed Income
On Thursday, global bonds shrugged off the rebound on the US equity markets and closed significantly higher, as investors reacted relieved following this week’s last US Note auction. Similar to this week’s 2- and 5-year Note auction, demand and bidding were again very strong in the 7-year Note auction.
Earlier in the session, bonds had already been well supported by the unexpected decline in the euro zone new industrial orders and a rise in the US initial claims. A weak performance of the European equity markets and lower money market rates in response to the ECB’s massive supply in liquidity all added to the positive sentiment on the European bond market, especially at the short end of the curve. Indeed, most money market rates fell to new historical lows after the ECB injected a record amount of €442B in its first one-year tender at 1%. This resulted in a bullish steepening of the European yield curve, with German 2-year yields falling by 7.1 basis points compared to 2.4 basis points in 10-year yields.
In the US, yields fell even more sharply despite the rebound on the equity markets with 2-year yields down 7.1 basis points, 5-year yields 12.2 basis points, 10-year yields 14.5 basis points and 30-year yields 9.3 basis points.
Fears for a credit squeeze in Germany rise
Today, the calendar contains the Belgian and German CPI inflation data (June); in the US, the personal income and spending data (May) and final figure of June Michigan consumer confidence are on the agenda.
Last month, the Belgian inflation rate fell into negative territory, while German and euro zone headline inflation came out flat. Both in Germany and in Belgium, inflation is forecasted to extend their downward trend in June. On a monthly basis however, both Belgian and German CPI are expected to show an uptick due to the increase in oil prices. In May, both US personal income and spending are expected to have risen by 0.3% M/M. If confirmed, this will be the first increase in personal spending in three months, which may provide another glimmer of hope that the worst might be behind us. The final figure of June Michigan consumer confidence is expected to confirm the first estimate, which came out somewhat lower than expected.
On the supply front, Italy will tap the market today with a 5-year BTP (3.75-5B) and a 14-year BTP auction (1.5-2.25) as well as a 12-year CCT auction (0.75-1.5B).
On the ECB front, ECB’s Bini Smaghi issued some criticism at the address of the Fed, when he said that ‘I hope that this crisis will prove that central banks must focus only on price stability’. That’s the rule in all countries except where the crisis exploded’.
On the money market, Euribor rates dropped to new record lows in the wake of the massive amount allotted in Wednesday’s one-year tender. The main question however remains whether the excess liquidity will be deposited at the ECB or will be used to step up lending. Yesterday, ECB’s Provopoulos said that ‘it’s absolutely necessary that the credit system continues to smoothly provide financing, at a logical cost, to businesses and households’. Earlier during the week, ECB’s Weber already warned that if banks don’t pass on more favourable financing conditions ‘direct intervention in the capital markets may become necessary’. This may suggest that the ECB could go beyond its plan to buy up to €60B of covered bonds to ease market interest rates, if financing conditions don’t improve. And this morning, the FT runs an article on the risks for a German credit squeeze after the German BGA exporters’ association forecasted a ‘dramatic deterioration’ in credit conditions in coming months, which would result in ‘massive financing squeeze’.
Regarding trading, government bonds have rebounded quite strongly over the past two weeks, as investors turned more cautious about the economic recovery and want too see more hard evidence of improving economic conditions. The more cautious mood was also reflected on the equity markets, as most European and US indices failed to break above the year highs in a sustainable manner and turned south again. From a technical point of view, the Bund is currently under the positive influence of a double bottom formation with the neckline at 119.31, while in the US, the T-Note future has reversed a previous break down. Yesterday, the Bund broke also above its downtrend channel (today at 120.22), while the T-Note future moved above the neckline of a double bottom formation at 115-25. If confirmed today, this would further improve the technical outlook.
In the UK, the financial stability report has been published, but isn’t expected to have an immediate impact on trading.
