Markets: Fixed income
On Thursday, global core bonds were in a wait-and-see modus, digesting the steep losses of the previous days. There was some intraday volatility ahead of the Summit, but it failed to give firm direction and bonds couldn’t hold on to intra-day gains, suggesting that indeed the previous sell-off scared investors. There was at times a good inverse correlation with equities, but not always. The US eco data, initial claims and Philly Fed were weaker, we think, even if the former were still distorted according to LBS while the stronger Philly Fed headline was not confirmed in its details. Treasuries did gain somewhat, but later on sellers took the lead sending US Treasuries lower. In a daily perspective, US yields were 0.4 to 1.6 bps higher, while German bonds were narrowly mixed (2-year 1.3 bps higher, 30-year 1.4 bps lower.
On intra-EMU bond markets, 10-yr yield spreads closed virtually unchanged.
Spanish bonds once again outperformed and the Spanish spread dropped another 12 bps. At the start of the session, there was some downward correction in Spanish bonds after Wednesday’s rally. However, Spanish bonds made a turn for a better on the back of strong auction results (see below). Bank of Spain data revealed that bad loans ratio ticked from 10.1%in July to 10.5% in August but this had no impact on markets. Today, EU Summit results will be digested (although there’s not that much to digest) and we might see some consolidation going into this weekend’s Spanish regional elections in Galicia and the Basque Country.
Today, the eco calendar is thin, especially in the euro zone with only Italian order data, while in the US the existing home sales are scheduled for release. EU leaders will continue their two-day Summit in Brussels, now tackling the growth and employment compact. Interesting theme, but unlikely to impact the bond markets.
US existing home sales are forecast to have dropped in September, after a sharp 7.8% M/M increase in August. The consensus is looking for a decline by 1.5% M/M to a total level of 4.75 million, but we believe that the risks are on the upside of expectations, especially after the strong building starts and permits released earlier this week. Favourable weather probably supported sales in September and also the trend in the US housing market remains favourable. Nevertheless, inventories of existing homes for sale are scarce, which limits the upside potential for existing home sales. In Italy, both industrial orders and sales will be released. The data are already rather outdated as they are still from August.
Yesterday, Spain and France supplied the market. The Spanish treasury tapped the off the run 3-yr Bono (€1.64B 4% Jul2015), the on the run 5-yr Bono (€1.46B 4.25% Oct2016) and the on the run 10-yr Obligacion (€1.51B 5.85% Jan2022) for a total amount of €4.61B, exceeding the upper range of the €3.5-4.5B range. The overall bid cover was 2.35, which means the auction drew over €10B bids. It was also the first time since the start of the year that such a “large” amount was allotted for the 10-yr tenor. On the secondary market, Spanish yields declined after the auction results which is also a positive. With the Moody’s downgrade threat removed as an imminent danger, investors took the auction as an opportunity to anticipate on a bailout request and ECB support. Spain now raised around 92% of this year’s expected issuance. The French debt agency tapped the on the run 2-yr BTAN (€1B 0.75% Sep2014), the off the run 5-yr BTAN’s (€1.45B 2% Jul2015 & €0.8B 2.5% Jul2016) and the on the run 5-yr BTAN (€4.72B 1% Jul2017) for €7-8B. They also raised an additional €2.1B with the creation of a new 10-yr inflation linked bond (0.1% Jul2021). As always, the auctions went smooth. The French debt agency is nearly fully funded for the year as it already completed 96% of this year’s planned issuance. The Italian treasury concluded the sale of a third retail bond (BTP Italia). The 4-yr (Italian not EMU) inflation-linked bond (2.55% Oct2016) was a huge success. The total amount sold was just above €18B. This amount makes up for around 3 auctions.
The timing of the registration period (this week) was of course a windfall given the risk appetite sentiment towards the periphery. Thanks to this placement, Italy increased this year’s funding from 77% to 85% of the expected issuance.
The Republic of Slovenia plans to sell $-denominated 10-year benchmark note. Initial guidance is that they will be price in the low 6% area. It’s interesting to see that Slovenia, often named in one breath with Cyprus and Spain, issues a new benchmark. We will follow up on this issue.
Overnight, EU leaders ended the first day of the EU Summit. Main point of discussion was the EMU banking supervisor (Single Supervisory Mechanism SSM). Leaders agreed to put the ECB at the center and to finalize the legislative framework by the end of the year. The implementation would take place over the course of 2013. Until the SSM is in place (and runs effectively), the ESM won’t be able to directly inject cash into failing European banks. The timetable foresees all EMU banks being under the purview of the SSM but officials insisted that national supervisors would continue to have day-to-day responsibility for smaller, regional institutions. The ECB would however retain the ultimate power to intervene in any bank at any time. Regarding the single resolution mechanism and a single deposit guarantee scheme, the Summit came to no conclusions. Overall, we think the agreement is a delay of the original plans.
EU leaders made a separate statement on Greece. They welcomed progress made and the determination of the Greek government. They leave it to the Eurogroup to examine the outcome of the review in light of the Troika report and to take the necessary decisions. Regarding Spain, they mentioned no single word.
Regarding trading, overnight the EU published its statement. We summarized the main points above. Overall though, it shouldn’t have direct impact on markets today, even if is important for the EMU. The unchanged opening of the Bund looks to confirm that view. The second day of the Summit is devoted on growth and employment and is not immediately relevant for markets. The eco calendar is less enticing. There are upside risks for the Existing Home Sales, but markets already coped with stronger housing data this week, making it unlikely that the Existing Home sales report will be a dominant theme. US equities were volatile yesterday in the wake of the prescheduled Google results. Asian equities are trading narrowly mixed. This gives us very little clues about the direction of today’s trading. US earnings results might be a factor later in the US session.
Following the steep declines of core bonds on Tuesday/Wednesday, the stabilization yesterday was no real surprise. We think that the consolidation may continue and therefore keep our view:
“Trading may occur in the lower part of the broad sideways trading range with risks for a retest of the 138.41/26 range bottom. Very short term, the sell-off looks and smells like a capitulation, which needs digestion. The target of the double top formation at 139.47 was taken out yesterday (see graph). So, we would favour a sell-on-upticks strategy, preferably entry levels close to 140.71, for a move towards the range bottom (138.41/26).
This is a very strong support area and should be difficult to break in a first attempt. Therefore, we wouldn’t front-run on such event, advising shorts to consider partial profit taking when this support should be tested.”
