Uncertainty on Greece underpins core bonds

Rates

On Friday, global core bonds traded with an upward bias. The eco calendar was empty but investors remained cautious ahead of the weekend with Greek event risk looming (more on Greece, see below). The ECB raised ELA funding for Greek banks a second time in three days amid increased deposit outflows.
Sources indicate that they amounted up to €4B last week. At the end of the session, German yields dropped up to 5.6 bps (10-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -1 bp (Portugal) and + 5 bps (Spain) with Greece outperforming (-31 bps).

The US yield curve bull flattened with yields 1.6 bps (2-yr) to 8.2 bps (30-yr) lower despite hawkish Fed comments towards the end of US dealings. SF Fed governor Williams, who votes this year, argued that the Fed should raise rates twice this year, each time by 25 bps. Inflation remains his biggest concern while he thinks the economy is on a solid trajectory with a good deal of forward momentum. He expects the full employment level (5.2% unemployment rate) to be reached later this year. Cleveland Fed Mester believes that raising rates right now wouldn’t be a problem for the economy as a whole though it’s hard to determine at the point how many rate increases will happen in 2015.

Decisive EU Summit?

Today, the eco calendar contains the first estimate of EC’s consumer confidence for June and the US existing home sales. The focus will however be on the EU Summit on Greece. Ahead of the Summit, the eurogroup meets. Belgium (OLO) taps the market and ECB’s Coeuré is scheduled to speak.

In June, EC’s consumer confidence is forecast to have weakened for a third straight month. The consensus is looking for a decline from -5.5 to -5.8, following a more significant weakening in both April and May. Belgian and German consumer confidence however extended their uptrend this month and therefore we believe that also the euro zone reading might surprise on the upside. Greek uncertainty probably had no material impact. In the US, existing home sales are forecast to have rebounded by 4.4% M/M in May to a total level of 5.26 million. Although tight inventories are still restricting sales, we believe that the risks are for a stronger outcome due to favorable weather conditions, the spring selling season and the outlook for higher rates in the future.

Belgian OLO auction: plain vanilla?

The Belgian debt agency taps the off the run OLO 58 (3.75% Sep2020), the on the run 10-yr OLO 74 (0.8% Jun2025) and the on the run 30-yr OLO 71 (3.75% Jun2045) for a combined €2-2.8B. We expect plain vanilla demand. Last week’s EMU bond auctions drew already better demand than during May early June with more and more investors finding the recent spread widening attractive. On the other hand, volatility around the time of the auction could be elevated because of Greece, which is a negative. Year-to-date, Belgium already completed 61% of this year’s expected funding need.

Today: D-day for Greece?

Overnight, Asian stock markets trade marginally positive with Chinese markets closed for Dragon Boat Day. The US Note future is significantly lower. Greek developments explain the cautious risk on sentiment.
Yesterday evening, the Greek government sent a new proposal to creditors. In a first reaction, the EC embraced it as “a good basis for progress”. This could lead to a weaker opening for the Bund as well, though initial followup losses are unlikely given high uncertainty.

Today’s eco calendar is empty but Greek headlines will trigger quite some volatility. It’s hard to take a directional view as event risk remains high with the outcome uncertain. Intraday rumours of a deal are positive for risk sentiment (tighter spreads, weaker Bund). At 10.30 am, the ECB meets on raising the amount of ELA funding again. At 11 am, Greek PM Tsipras talks with IMF Lagarde, ECB Draghi, EC Juncker and Eurogroup Dijsselbloem. At 12.30 pm, a Euro group meeting starts and finally the EU Summit of Heads of States is scheduled at 7 pm. EU leaders urged Greece to reach an agreement beforehand.

In the US, speeches by Fed Mester and Williams (voter) were hawkish and support our September rate hike call. Technically, any eventual further down-leg of the US 10-yr yield isn’t expected to go beyond 2.08% in the near future though (127-23 resistance US Note future). A correction towards those levels could be an opportunity to sell Treasuries.