The ECB conducts its weekly MRO and SMP tenders

Rates

Global core bonds started the trading week quietly. They traded with a slight downward bias but eked out small gains as the situation in Ukraine risked re-escalating (rumours on armed violence in Crimea). ECB’s Noyer, warning on risks of the current strength of the euro, and Fed’s Plosser, pointing out that the Fed may have to accelerate tapering, were unable to stir markets. At the end of the session, German yields fell 1.3 bps to 2.8bps, the belly of the curve outperforming. In the US, yield changes ranged between -1.5 bps (5-yr) and +0.1 bps (30-yr). On peripheral bond markets, Belgium underperformed the EMU (semi-) core and Ireland underperformed in the periphery both for supply reasons. Belgium announced the launch of a new 20-yr syndication and Ireland will hold its first regular auction since 2010.

Today, the eco calendar remains thin with only US NFIB small business confidence and the final Greek and Italian Q4 GDP data on the agenda. EU Finance Ministers meet in Brussels and Belgium (20yr syndication), Holland (DSL) and the US (3Yr Notes) will tap the market.

Despite poor weather conditions, US NFIB small business confidence picked up during the previous two months and is now again close to the cyclical highs. For February, the consensus is looking for a broadly unchanged figure, 94.0 from 94.1 in January. The ISM surveys last week showed a mixed picture as the manufacturing index improved more than expected, while the non-manufacturing reading fell back significantly. For small business confidence, we have no reasons to distance ourselves from the consensus. In the euro zone, Greek and Italian GDP data are already outdated and therefore less interesting for markets.

The ECB conducts its weekly MRO and SMP tenders. For the MRO, €87B loans mature, while for SMP the ECB will try to drain €175.5B. Tomorrow, a new reserve period starts, which usually leads to front loading on reserve requirements by banks. This may reduce excess liquidity. Given the fact that banks announced to repay €11.2B in LTRO loans, excess liquidity could fall further towards €100B. Both factors make us believe that banks will ask more at the weekly tender and that it could be harder for the ECB to sterilize its bond portfolio. For eonia rates, the impact should then be rather neutral with additional liquidity offsetting the impact of the new reserve period.
Nevertheless, current eonia rates (around 15-17 bps) should be a bottom for the market.

Today , the Dutch debt agency taps the on the run 3-yr DSL (€2.5-3.5B 0.5% Apr2017). From a micro perspective, the Apr2017 trades slightly cheaper in ASW spread terms compared to the surrounding Jan2017 & Jul2017 DSL’s. The bond gave no specific concession going into this auction. The Kingdom of Belgium announced the launch of a new 20-yr syndicated OLO yesterday (OLO 73 Jun2034). The bond will be launched in the near future, likely today. There had been quite some speculation on a new 15- or 20-yr benchmark of late which led to an OLO underperformance and especially at that bucket of the curve. This should be supportive for the deal. Positive rating action by Moody’s and S&P (outlook from negative to stable) should help as well. In the US, the treasury starts its mid-month refinancing operation with a $30B 3-yr Note auction.
Currently, the WI is trading around 0.805%.

Overnight, Asian equity indices trade mixed witch China and India underperforming. The US Note future is flat, giving no indication for the start of Bund trading. After the Eurogroup meeting, Finance Ministers claimed to have made good progress for a compromise on the Single Resolution Mechanism. Exceptionally, the Ecofin already met after the Eurogroup and the start of today’s discussions has been pulled forward.
Both signal willingness to broker a deal and Eurogroup president Dijsselbloem eyed a final agreement by the end of March, ahead of the May European parliament elections. Any progress on the SRM at the Ecofin meeting is not expected to have a big impact on trading. Today, the eco calendar remains thin (see above) and unlikely to influence bond markets. Therefore we hold a neutral bias for today’s trading session. The situation in Ukraine remains a wildcard as we’ve seen yesterday.

Following last week’s payrolls report, the US Note future tested the downside of its recent trading channel (123-15+; 2.78% in yield terms). A break below would change the technical picture, but given the thinness of the calendar this week we believe that we might have to wait on Thursday’s retail sales to see such a move possibly happening. The German Bund future outperformed last week and is now in the middle of the recent trading range. Given the outcome of last week’s ECB meeting, we believe the upside is blocked and eventually eye for a return towards 141.20 (downside recent range). A sell-on-up ticks strategy is preferred in case bonds fall below the downside of these ranges.