Markets: Fixed Income
On Thursday, global bonds followed a slightly different path. Indeed, while both US and German yields ended the day higher, the gains in the US were more pronounced. Indeed, US yields were up 2.5 to 5 basis points, while German yields ended 1.5 to 2.5 basis points higher. The good run in the past few sessions had increased the appetite for profit taking, which occurred in a mild way yesterday. German bonds remained underpinned by safe haven inflows linked to renewed tensions around Greek debt.
US bonds were additionally hit by rumours that the Fed would raise its discount rate, bringing the spread again to 100 basis points with the FF rate. Ultimately, the Fed didn’t raise the discount rate, but it seems very plausible that the Fed won’t wait too long before raising the discount rate again. It would simply be a normalization of its policy following the emergency measures taken during the crisis, which included a narrowing of the spread between discount and FF rate. On February 18, the Fed in a surprise move raised the discount rate from 0.50% to 0.75% and it decided taking effect on March 18 (yesterday) to shorten the duration of discount loans to one day. We suspect that the rumour was linked to the timing of the shortening of the duration. However, in the statement accompanying the early discount rate increase, the Fed said it would assess over time whether further increases in spreads were appropriate in view of the experience with the 50 basis points spread. Because the duration is only since yesterday 1 day, it looks too early to expect already another discount rate hike, as the Fed will need more time to assess the situation. The announcement of a $118B end-month financing package including a $44B 2-year Note, a $42B 5-year Note and a $32B 7-year Note, may have added to the pressure. The auctions take place next week.
The US eco data caused some market moves, but had no lasting impact, even if Treasuries ticked up after the early morning data that were all in all near expectations. However, it was the uptick that was the starting point of the selling.
The Fed speakers on duty, Hoenig, Pianalto, Lacker and Duke presented a united front against a proposal that would strip the Fed of the authority to supervise small banks. They said they would lose an important finger on the pulse of the economy and Hoenig called it travesty. It would make the central bank the central bank of Wall Street and not of the US. They refrained from comments on the economy or on monetary policy.
In EMU, the Greek saga remained the talk in town. The Greek government raised the pressure in its quest for more substantial and concrete EU help, by saying that it cannot achieve the promised deficit cuts if the borrowing costs remain so high and may have to call in the IMF. The country denied however that it would seek IMF help in the long Easter weekend. There was some reaction on the opinion of the German chancellor Merkel who said on Wednesday that the IMF might be a solution in some cases and also that it should be made possible to expel under certain conditions a member from EMU. The Spanish Economy Minister urged the chancellor to avoid talk of a possible expelling of fellow members from the euro, as such comments could be misconstrued. The rift inside EMU and the rising tensions were reflected in the intra-EMU bond market. The Greek credit curve flattened (inverted again), suggesting that indeed the prospect of near term upheaval, default or restructuring increased. Indeed, the 2-year yield spread shot up 38 bps (387bps) while the 10-year spread rose by 14 basis points (313 bps). The damage for the other peripherals like Spain, Ireland, Portugal and Italy was limited to a spread widening of 1–to-3 basis points.
Today, eco calendar is thin and uneventful, as it only contains the Italian industrial orders (January) and Belgian consumer confidence (March), which are no market movers. But interesting might be the speeches of ECB President Trichet and IMF Director Strauss-Kahn at a conference in Brussels.
The hardening of the German government versus a EU-support package for Greece and talk about the possible intervention of the IMF and the possible expulsion of some fellow EMU members under some conditions have raised tensions inside EMU. Especially ECB President Trichet, who a few weeks ago explicitly excluded IMF intervention in the Greek case and who applauded the courageous Greek austerity package, has come in a difficult position and might lose authority and credibility if ultimately Greece turns to the IMF for help. We are not aware of the subject of the conference at which he and others speak. It is also far from certain he might say something about Greece, as long as it is unclear how things are evolving. However, it is clear that if he says something it might be key for trading. Indeed, the remainder of the calendar is uneventful.
Re-iterating our view on trading, we were sceptical that bonds still had much upside, but were taken awry by the dovish FOMC decision. We acknowledge, as we did before, the fact that bonds showed strength and saw subsequently no reason to row against the tide, certainly not until a clear technical signal occurred, which didn’t occur. The Bund broke above resistance, which is a positive, but we need a similar break of the German 10-year yield below 3.09% (now 3.10%), level that acted as bottom of the 3.09-to-3.43% sideways trading range that holds already for months. The downside was in vain tested four times intensively. So, the technicals are bullish, but an important hurdle remains for the time being. However, we wouldn’t go against the trend and speculate the level will continue to hold. Indeed, fundamentally, the FOMC decision will resonate over the market for some time and inside EMU, it seems that the conflict surrounding Greece may mount again in the next few days giving further support for the safe haven Bunds. Our technical analyst observes that yesterday’s price action left a trend reversal signal on the charts (new high, but near below previous close). However, the signal is less strong than a bearish engulfing pattern. So we consider it as a mild warning signal for short term trading. The bullish picture will only worsen when the uptrendline at 122.11, with a decline below the medium term average at 122.74 another early warning signal.
Concluding, we stand aside and look how bonds will cope with the 3.09% resistance level. However, no reasons to become negative, even if there looks to be little value in the German bond market. The issue of the Greek story may hold the key for the next move.
Also in the UK, the calendar is empty today.
