Fed extends scope of corporate credit facility

Core bonds started strong, but an intraday U-turn erased most gains. Soured risk sentiment in Asia and at the start of European trading provided the initial boost on growing fears that the rising number of COVID-19 cases will trigger new lockdown protocols in several countries including the US. A Fed announcement started the intraday turnaround. The US central bank will extend the scope of its Secondary Market Corporate Credit Facility (SMCCP) to include individual corporate bonds. To date, it only purchased ETF’s tracking the corporate bond markets under the programme. The Fed built an internal index made up of all the bonds on the secondary market that have been issued by US companies that satisfy the facility’s minimum rating, maximum maturity and other criteria. It will target the index in deploying a buying strategy. Main US stock market indices overturned 2.5% opening losses into gains. Daily changes on the US yield curve ranged between -0.3 bps (2-yr) and +1.7 bps (10-yr). German yield changes were limited between -1 bp and +1 bps across the curve. Peripheral yield spreads vs Germany ranged between -3 bps and +2 bps.

Asian stock markets join the rebound this morning with Japan outperforming after the BoJ strengthened its determination to support the economy (see below). US President Trump is supposedly preparing a proposal for a $1 tn infrastructure plan. Core bonds trade below yesterday’s softest intraday levels.

Today’s eco calendar contains May US retail sales and industrial production. The slow reopening of economies suggests a rebound after April’s historic falls in both activity gauges. Consensus expects a 8.4% m/m advance for retail sales and 3% m/m for industrial production. We remain cautious, especially for consumer spending given depressed consumer confidence figures. Fed Chair Powell starts his Humphrey-Hawkins testimony in US Congress where he’ll defend last week’s Fed story line. Any market impact should therefore remain limited. European stock markets are set to opened on a positive footing as well. A constructive video call by EU leaders and UK PM Johnson on Brexit could give an additional push in the back. We fear that rising coronacases and the risk of 2nd economic hit will return to the fore as main trading theme though in coming days/weeks.

Technically, the US 10-yr yield returned in the April-May trading range. Adverse risk conditions could force a test of the lower bound around 0.56%. The German 10-yr yield turned south as well after failing to break sustainably above the -0.31%/-0.29% resistance area. First support stands around -0.50%.

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