Markets: Fixed Income
On Friday, global bonds lost further ground, as the correction on the equity markets failed to offer support. The eco data were mixed with the euro zone PMI surveys and the US existing home sales coming out much stronger than expected, but the UK Q3 GDP showing an unexpected contraction. Hawkish comments of Fed Plosser, technicals and some pre-positioning ahead of this week’s massive supply in the US may have added to the deterioration in sentiment on the bond markets.
Global bonds opened lower on Friday after Fed Plosser said on Thursday night that he’s willing to raise rates before many of his colleagues at the FOMC (Although he is currently a non-voter) and on the back of the late rebound on the US equity markets on Thursday. Strong PMI surveys in the euro zone added to the bearish sentiment on the bond markets. An unexpected contraction in the UK Q3 GDP figures however provided support and bonds rebounded ahead of the US session. There, the existing home sales surprised on the upside, but failed to inspire investors, as both bonds and equities remained largely unaffected after the release. Equities even moved gradually lower throughout the session, while bonds closed almost at the intra-day lows.
In the US, the belly of the curve was hit the hardest, as 5- and 10-year yields rose by 8.8 and 7.7 basis points compared to a rise of 6.5 basis points in 2-year yields and 5.6 basis points in 30-year yields. In Germany, there was a bear steepening of the yield curve with 2-year yields up only 0.5 basis points, but 5-, 10- and 30-year yields up by respectively 3.7, 4.2 and 4.8 basis points. The intra-EMU sovereign spreads stabilized on Friday, although Greek bonds underperformed slightly after Fitch downgraded the country’s rating from A to A- and kept a negative outlook in place.
US T-Note future falls below key support ahead of supply
The calendar is empty today, but will heat up later this week both in the US and euro zone.
In the US, we will receive more data on the housing market (S&P Case Shiller home prices, new home sales), some confidence indicators (Richmond, Chicago Fed and consumer confidence) and the first estimate of third quarter GDP. Last week, most US housing data surprised on the downside of expectations, which might be due to the expiration of the government’s stimulus plan for the housing sector. Nevertheless, tomorrow, the S&P Case Shiller house prices are forecasted to extend their uptrend in August and also new home sales are forecasted to show an improvement in September. We believe however that the risks are on the downside of expectations after last week’s disappointing data. Earlier this month, the NY Fed manufacturing surveyshowed an impressive improvement, while the Philly Fed survey deteriorated somewhat. This week, both the Richmond and Chicago Fed are forecasted to show a slight increase and also Conference Board’s consumer confidence is expected to show a marginal improvement in October. But most attention will of course go to the third quarter GDP figures. After four consecutive quarters of negative growth, the US economy is expected to have climbed out of recession in the third quarter. The consensus is looking for an annualized growth figure of 3.0% Q/Q dominated by strength in consumer spending and a slower pace of inventory liquidation. Also a jump in non-residential fixed investments and government spending is expected. Residential investment and the net export deficit are forecasted to show a negative contribution.
In the euro zone, the M3 money supply and credit growth data, European Commission confidence indicators and CPI inflation data are scheduled for release. Tomorrow, M3 money supply growth is expected to show a further slowing from 2.5% Y/Y to 2.2% Y/Y. A lot of attention will also be focused on the credit growth data given the fears about a credit crunch in the euro zone. In October, CPI inflation is forecasted to increase again after the slight decline in September. In the coming months, inflation is forecasted to trend again higher, as the energy related base effects start to wane again. The European Commission’s confidence indicators are forecasted to confirm the improvement in the PMI’s.
On the supply front, the US Treasury will re-open its a 5-year TIPS today for an amount of $7B. Later on this week, the Treasury will issue also new 2-, 5- and 7-year benchmarks for a total amount of $116B after the size has been upped for all maturities. There is only a redemption of a 2-year Note worth 21B this week. As such, the auctions will raise 102B in new cash. The US Treasury market may be more nervous ahead of this week’s auctions, as the supportive Fed purchases are coming to an end and on news reports that China may diversify its currency reserves (see currency part for more details). The Fed will hold its last Treasury purchase on Thursday in the 2013-2016 maturity sector, as they will then have reached their target of $300B of Treasuries. In the euro zone, Germany, the Netherlands and Italy will tap the market this week. The net cash flow will be positive following a huge redemption from France and coupon payments from France and Portugal.
Regarding trading, supply concerns may dominate trading today and result in more losses, as the eco calendar is empty and central bankers have indicated that it still too early to start withdrawing monetary stimulus. The decline in the US equity markets failed to support the bond markets on Friday and this morning’s constructive equity session in Asia points to a higher opening of the European equity markets. Along with the recent deterioration of the technical picture, this may lead to further losses on the bond markets today.
Regarding the European bond market, the longer-term bullish technical picture of the Bund started to deteriorate two weeks ago when the bund fell below a previous reaction high at 121.74. This was a first warning signal that the underlying sentiment was deteriorating. Last week, the Bund also fell below its long-standing uptrend channel, which could now lead to a test of the September lows at 119.85. However, only a fall below the September lows would put an end to the higher high, higher low pattern and suggests that a substantial downward correction is looming.
Regarding the US Treasury market, early October, Treasuries broke key resistance levels, suggesting that another up-leg was in store. However, recent price action has been disappointing and the confirmed drop below the previous high at 118-17+ (TNote future) only confirmed the corrective move. In the cash markets, the re-break above 3.30% (10-year) and 4.15% (30-year) confirmed the technical picture of the futures. This morning, the US T-Note fell below the next key support level at 117-19, which if confirmed would point to a further deterioration of the technical picture.
In the UK, the calendar is empty today.
