Markets: Fixed Income
On Friday, in a thinly traded session devoid of macro economic data releases or relevant other news items, global bonds resumed their week-long down-move that, especially in the US, had temporarily been interrupted on Thursday. In the absence of clear drivers, we mention talk about fresh supply as a potential reason for the negative price action. Indeed, the US will need to absorb this week $112 B of new government Notes in the 3, 5 and 7-year sectors, while in the EMU area, attention focuses on the new German €7B 5-year BOBL. The market also no-ticed the announcement of the Spanish debt agency that it will tap the 30-year seg-ment in Q4. Part of the decline occurred after the official closure of the EMU markets and thus isn’t reflected in the daily tables. Technically, the down-move hasn’t yet broken key support levels, but both the T-Note future and the Bund are now near these levels at 116-18 and 120-17.
In a daily perspective, US yields rose between 5 and 9 basis points, the belly, where the supply for this week is concentrated, underperforming the wings. In EMU for reasons mentioned above, yields were flat (2-year) to slightly higher by 1 to 3 basis points further out the curve.
Bond markets await FOMC meeting and supply
Today, the calendar is thin as it only contains the US leading indicators (August). In August, US leading indicators are forecasted to show the fifth consecutive increase. After an increase by 0.6% M/M, the consensus is looking for an improvement by 0.7% M/M. We have no reasons to distance ourselves from the consensus. Later this week, the US calendar heats up with the Richmond Fed survey, new and existing home sales and durable orders. After stabilizing in August, the consensus is looking for a marginal improvement in the Richmond Fed (from 14 to 16) in September. After the better than expected New York and the more mixed Philadelphia Fed, it is inter-esting to see how manufacturing thrived in Richmond. Both new and existing home sales showed four consecutive increases, indicating that the worst for the US hous-ing market is behind us. In August, both indicators are forecasted to extend their re-bound, providing further evidence that the US real estate market is recovering. In July, the durables surprised on the upside of expectations (5.1% M/M) mainly due to nondefense aircraft orders. For August, only a marginal increase is expected..
In the euro zone, the eco calendar is more exciting as it contains the PMI’s, IFO and M3 money supply and credit growth data. The services and manufacturing PMI are forecasted to extend their rebound in September. The manufacturing PMI is expected to approach the 50 boom/bust level, while the services PMI is forecasted to jump into expansionary territory. The German IFO might receive less attention after the publica-tion of the PMI’s, but is still a useful double-check for the situation in the key German economy. In July, M3 money supply slowed again more than expected, but the data revealed an encouraging sign as M1 rose significantly. It will be interesting to see whether the August data will provide further evidence that the ECB’s measures are starting to have an impact.
In the UK, the calendar is empty today and quite uneventful further out this week.
With regard to monetary policy, the FOMC rate decision and statement on Wednesday will be closely scrutinized to see whether the timing of the exit strategy is coming closer. While we think that the FOMC will choose not to inject uncertainty in the market and thus won’t give more concrete signs about the end of some of its emergency measures taken in the financial markets, besides at least those already communicated, it remains a risk for the market. In the euro zone, there are very few ECB speeches scheduled for this week. Last week, several ECB governing council members have confirmed that the time to exit has not come yet, but sounded con-cerned that the current stimulative global monetary environment could lead to new asset price distortions if maintained for too long. However, as next week, the ECB will hold its tender for 1-year money at full allotment and against the fixed repo-rate of 1%, it would be a surprise if they would already announce more concrete steps in the exit process. Based on the eonia futures, markets expect the unwinding of the non-standard measures to start only in the second half of next year, which may prove too complacent though in our view.
On the supply front, the US Treasury will auction new 2-, 5- and 7-year benchmarks for a total amount of $112B, while in the euro zone the Netherlands and Germany will tap the market. In the euro zone, the focus will be on the new 5-year Bobl Oct14, which will be sold on Wednesday for a total amount of €7B. Last week, demand at the auctions remained quite strong, despite the low level in yields. We have no strong reason to expect this to change this week, although the net cash flows will be nega-tive to the tune of about €6-8B.
Regarding US Treasury trading, we were surprised by the strong run of Treasuries in August and early September in the face of stronger eco data, rallying equities and a weakening dollar and advocated a defensive attitude vis-à-vis Treasuries. We were quite well served last week as a correction occurred. However, the correction still has technically no meaningful significance, even if it brought the Note future near first support levels. With the eco calendar thin an uneventful ahead of the Fed meeting and decision on Wednesday we expect more sideways range-bound trading early this week. While we remain moderately negative for Treasuries further out, it might be a bit early to see them selling off in a major way. So we would sell Treasuries on up-ticks, if possible closer to the recent high at 118-16+ (10-year T-Note future). How-ever, should Treasuries decisively drop below 116-18 we would jump the band-wagon. Should we be wrong and a powerful rally takes off, one needs to survey, in the cash market, the key technical support levels (that would paint double tops if broken) that stand at 0.85% for the 2-year, 1.35% for the 3-year, 2.16% for the 5-year, 3.25% for the 10-year and 4.15% for the 30-year. Only a break below these levels would really unclog the market and open perspectives for more gains. How-ever, following the recent correction, it is now more likely to look for signs that the August-early September bull-run is over. A fall below 116-18 would be such a sign.
Regarding European bond trading, the Bund failed to build out recent gains and closed lower for the fifth consecutive day on Friday. Hence, the technical break higher above the necklines of two double top formations at respectively 120.84 and 121.12 has failed to generate additional upward momentum and the Bund on Friday tested the recent lows. However, only a break below 120.17 (now neckline potential double top) would suggest that the upside is rejected and would open the door for more downward correction, also as the uptrendline from the 116.37 low comes in near this level (120.25) (cf. graph). On the upside, only a sustained break above the previous reaction highs at 121.70/74 would suggest that a new up-leg is in the offer-ing, as this would also correspond with a break below the recent lows in 10-year yields at 3.20%. While the current picture is one of indecisiveness, there are some prevailing risks on the downside for bonds though. However, as we expect the ECB to refrain from withdrawing its liquidity supportive policy in the next few weeks, as a 1-year tender at 1% will be held next week, it might be a bit too early to get a decisive break to the downside, which remains our view in a medium term perspective though. Short term, bonds may tick lower and test the support.
