Markets: Fixed Income
On Monday, in yet again a thinly traded session devoid of macro economic data releases or relevant other news items, global bonds ended narrowly mixed, the curve a tad steeper. In the US, yields were flat to marginally lower in the 2-to-5-year sector and up about 1-to-2 basis points further out. In EMU, German yields were down 2 basis points in the 2-to-5-year sector and up 3 (10- year) and 3.9 basis points in the 30-year sector.
Intra-day, the price action showed two faces. EMU bonds started weak, reflecting the price moves in late Friday US session, and tested immediately the downside with the Bund marginally ticking below key support at 120.17. The longer end was pressured by the Spanish 30-year Obligacion. However, the market turned higher as soon as equities opened weaker and registered additional losses further out. The upmove of bonds continued during the whole European morning session. In the US session, Treasuries started to rally, mirroring the up-move of EMU bonds in the EMU session. It helped EMU bonds to keep their initial gains. The rally was helped by Fed Treasury purchases in the Dec 2013 to April 2016 sector and ongoing equity weakness. However, when equities turned higher later in the US session and stabilized thereafter, Treasuries (and EMU bonds) slid away, essentially losing all intra-day gains. Renewed attention for the upcoming slew of new Treasury and corporate supply probably added to the downward pressure. Intra-EMU spreads were little changed on the day.
Bond markets await new impetus
The EMU eco calendar remains empty today, while in the US, the Richmond Fed survey on manufacturing (Sept), house prices (July) and some less important high frequency data like the ABC consumer confidence and the ICSC chain store sales are scheduled for release. 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 interesting to see how manufacturing thrived in Richmond. The details of the Philly Fed survey weren’t convincing regarding the power of the recovery. Overall though, we don’t expect the eco data to have much impact on the markets.
Regarding supply, the Dutch debt agency taps the 5.5% July 2010, the 4% July 2016 and the 5.5% January 2028 for a modest amount (€0-2B), while the Italian debt agency will hold an extraordinary auction of its 5% 2025 BTP for €1-2B. Yesterday, the Spanish Tesoro sold via syndication €4.5 B of the new 4.7% July 2041 Obligacion. More interest will go to the $43B US 2-year T-Note auction in the US, which is part of the weekly record $112B issuance in the 2-, 5- and 7-year sectors. The 2-year auction will raise approx. €20.9B, while the 5- and 7-year will raise all new cash upon settlement. Auctions went very well in recent weeks despite the increased record size. Last month’s 2-year Note auction went pretty well, but bidding was a bit sloppy as the auction stopped 1.1 basis points above the bid in the WI. The ever increasing size of the auction is the culprit. The timing of the 2-year might be a bit difficult, just one day before the FOMC decision, but overall we don’t expect the FOMC to wrongfoot the markets by announcing the imminent exit of its quantitative policy. There might be an extension in time of its MBS purchase program into 2010, but also a slowing in the pace of purchases, similar to what has been decided for its purchase of Treasuries. However, this shouldn’t be enough to unsettle the market we think. The size is a second negative, but given recent strong appetite in Treasuries, also from Asian buyers, the auction shouldn’t pose too much problems.
Today, another lacklustre session is likely. No eco data of importance and no public appearances are worth mentioning either. The FOMC meeting starts, but the results are only available late tomorrow evening. Equities looked ripe for a correction, which if it occurs would support bonds, but yesterday’s attempt to correct was aborted, suggesting that equity investors might need a trigger before considering taking profits. Such a trigger apparently doesn’t appear on the radar today. Asian stocks trade mixed but rather listless. This leaves the technicals and supply as the main obvious drivers today. The Bund is near support at 120.17 (previous low/uptrendline) and the US Note future near 116-18 support. Both levels held yesterday and ahead of the Fed and without other events today, we would bet the support levels will hold today too. Supply might impact more the shape of the curve than the overall direction of the market.
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 upticks, if possible closer to the recent high at 118-16+ (10-year T-Note future). However, should Treasuries decisively drop below 116-18 we would jump the bandwagon. 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. However, following the recent correction, it is now more likely to look for signs that the August-early September bull-run is over.
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 and Monday 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 offering, 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.
