The ECB holds its weekly MRO tender

Rates

Global core bonds kept their juicy post-payrolls gains, but couldn’t really build them out in a session that was dominated by an overall, albeit modest, risk-off sentiment. Tensions in east-Ukraine could have played a role. ECB and Fed speakers were also unable to give bonds impetus. Volumes were, as often on Mondays, very low. The US yield curve bull flattened with yields 1.6 bps (2-yr) to 2.6 bps (30-yr) lower. Changes on the German yield curve varied between -1.4 bps (10-yr) and +0.5 bps (2-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany added 1 to 5 bps.

Today, the eco calendar remains fairly light with only the US NFIB small business confidence indicator on the agenda. ECB’s Weidmann & Fed’s Kocherlakota and Plosser are scheduled to speak. Holland (DSL), Austria (RAGB), Norway (Bond) and the US (3Yr Notes) will tap the market and after market, Alcoa kicks off the Q1 earnings season.

In February, US NFIB small business confidence weakened sharply, from 94.1 to 91.4. While poor weather conditions might have weighed on sentiment, the details and comments pointed also to more structural problems. For March, the consensus is looking for a limited improvement, from 91.4 to 92.5. We believe that the consensus is quite fair, although risks might be for a slightly weaker outcome.

The ECB holds its weekly MRO tender, a one-month LTRO tender and the liquidity absorbing SMP tender. For the MRO and LTRO, respectively €110.6B and €7.5B loans mature, while for SMP the ECB will try to drain €175.5B. Last Friday, banks announced that they would repay €4.88B in LTRO loans. Tonight we will comment on the results of the MRO and SMP tenders and their impact on eonia rates/excess liquidity in our Sunset report. We look out whether the combination of liquidity operations can push excess liquidity below €100B for the first time since the end of 2011 (currently €103B). In case it would, will it add upward pressure on eonia?

St Louis Fed Bullard, the most hawkish governor on the FOMC board, repeated his expectations that inflation bottomed out and is poised to go higher towards the Fed’s 2% target. He expects GDP growth of about 3% this year and the payrolls didn’t change his view on QE tapering. All in all, his comments were similar to the ones made on March 27 and irrelevant to Today, the Netherlands and Austria will kick off this week’s scheduled EMU supply. The Dutch debt agency taps the on the run 5-yr DSL (1.25% Jan2019) for up to €3B. The bond cheapened around 2 bps in ASW spread terms going into the auction and trades a tad cheaper on the Dutch curve. The Austrian treasury sells the on the run 10-yr RAGB (1.75% Oct2023) and the on the run 30-yr RAGB (3.15% Jun2044) for a combined €1.21B. Since the start of the year, the Oct2023 RAGB cheapened around 4-5 bps in ASW spread terms compared with previous 10-yr benchmarks 3.65% Apr2022 and 3.4% Nov2022. This is possibly the final tap of this bond before a new 10-yr syndication. The Jun2044 RAGB cheapened around 4 bps the past fortnight but is relatively rich on the very long end of the Austrian curve. This week’s auctions will be supported by a €19B Bund redemption. Overall, we expect decent demand at both auctions. The FT reports that Greece mandated banks for the first syndicated bond since 2010. It’s expected to be a 3-5yr bond and Greece hopes to raise €2-3B. In the US, the treasury starts its mid-month refinancing operation with a $30B 3-yr Note auction. Currently, the WI is trading around 0.9%.

Overnight, Asian equity indices trade mixed. Japan underperforms and China outperforms on the back of stimulus rumours. The Bank of Japan kept policy unchanged and thus refrains for now from increasing its monetary base target. Today, the eco calendar is thin with only NFIB business optimism. We expect a slightly below consensus outcome, but this shouldn’t impact trading. Attention will also go to central bankers, but we don’t expect big news. ECB’s Weidmann spoke yesterday and Fed Kocherlakota and Plosser already shared their well-known views on several occasions. The former is an über-dove, the latter is the second most hawkish governor. The start of the US refinancing operation is a slightly negative for treasuries but we think that it will be mainly risk sentiment on equity market that will drive intraday gyrations on bond markets. The confidence vote in the French parliament on the reshuffled government is a wildcard.

Technically, the US 10-yr yield failed to break north of 2.80% after the in line with consensus payrolls. Given the relative thinness of the agenda this week, we believe the US 10-yr yield will remain in the 2.6-2.8% trading range, perhaps even until the next payrolls early May. For the German 10-yr yield, this trading range is between 1.5-1.7%. In the short term, the downside might be under pressure if the ECB QE debate continues producing soft headlines.