Markets: fixed income
On Wednesday, global core bonds turned higher again after a couple of modest profit taking sessions. Risk off sentiment dominated across markets, at least until a late rebound in US equities that erased intraday losses. So, European equities fell sharply, but so did commodities (CRB fell below key support, gold tests similar support) and the EUR (see FX section: EUR/USD lost key support). Intra-EMU yield spreads widened (marginally less than they narrowed in the previous session (see below). There wasn’t much hard new info on Greece, but the comments of Papademos on exit preparations (in other countries) was picked up and later more or less confirmed (see below).
Looking to core bond markets, the positive sentiment was in place during the whole European and most of the US session. Both the Bund and the June T-Note future reached new highs. In Germany, new record low yields were registered in the 5-to-30-year sector.
Noticeably, the 10-year yield closed below 1.40%, the 30-year yield blow 2% for the first time ever. Yield declines varied from 6.5 to 10.5 bps in the 5-to-30-year sector flattening the curve. The 2-year Schatz auction (coupon 0%) went well, keeping the 2-year yield at 0.05%. In the US, yields fell 2.4 to 5.1 bps, also flattening the curve, but no new record yields were registered.
On intra-EMU bond markets, spreads widened again (Spain 21 bps, Italy 17 bps, Belgium 8 bps, Austria/France 4 bps). The preparation of Greek exit plans and the growing awareness that the informal EU-summit wouldn’t come up with a deus ex machina pushed spreads out. Regarding the Greek exit, there were rumours of a teleconference of the Euro Working Group (experts who work for the EMU FM’s) which instructed to prepare Greek exit plans. The Greek FM denied this but Belgian FM Vanackere said “All the contingency plans come back to the same thing: to be responsible as a government is to foresee even what you hope to avoid.”
Spanish economy minister de Guindos told a congressional committee that the state would have to put at least €9B into saving bank Bankia, which would be fully nationalized. The rescue includes €7.1B in provisions for bad loans and €1.9B in capital buffers. Apart from the cost to the Spanish banking sector, Spanish officials also worry about how to help the Spanish regions refinance €36B of debt this year. The figure, revealed in the budget plans from 17 autonomous communities, compares with previous public data of around €8B bonds maturing in 2012. The difference is due to bilateral loans from Spanish banks to the regions worth €28B that were not made public previously. Many of the autonomous regions are however virtually blocked from financing themselves on public markets which means that the burden might fall on the Spanish central government. This is a negative for Spanish sovereign bonds and could lead to extra spread widening. Currently, the Spanish spread is close to 500 bps (482 bps; 10-yr yield >6%) and Spanish PM Rajoy yesterday called on the ECB to reactivate its SMPprogramme to push down Spanish yields: “I insist it is up to the ECB to take this decision that it has already taken in the past. All the measures I proposed can be taken in 24 hours, the most important one is guaranteeing the sustainability of the public debt of the EU.”
His call so far fell in deaf ears and ECB Draghi doesn’t seem to be willing to re-launch the SMP any time soon. Last summer, the effect was only temporary and eventually turned out to be an opportunity for others to offload their Spanish exposure.
Yesterday’s informal EU Summit as expected didn’t result in a specific outcome. According to comments afterwards, most of the debate was on the preparation of the growth pact (“building blocks” and “working methods” towards economic integration expected at June 28/29 EU Summit, dixit EU Van Rompuy) but so far no agreements were reached. EU leaders briefly touched on ways to support the European financial sector (Europe-wide deposit guarantee, using the ESM to inject capital directly into teetering banks) and the creation of Eurobonds but the views of the parties involved didn’t change. In a short statement afterwards, EU leaders also confirmed that they want Greece to remain in the euro area while respecting its commitments (to the Memorandum).
Today, the eco calendar is well-filled with the PMI’s in the euro zone, the German IFO business climate indicator, US durable goods orders and US jobless claims. In the UK, the second estimate of Q1 GDP will be released together with the breakdown. The US will tap the market (7Yr Notes) and ECB’s Draghi and Asmussen are scheduled to speak.
After an awful start of the second quarter, it will be interesting to see whether the PMI’s show some signs of improvement in May. Expectations remain however bleak as euro zone manufacturing PMI is forecast to show only a marginal increase, from 45.9 to 46.0, while euro zone services PMI is forecast to decline further to 46.7 (from 46.9). Last month, there was a big deviation between the first estimate of euro zone services PMI and the final reading, which suggests that sentiment deteriorated sharply during the month. We believe therefore that for the services PMI, a weaker outcome is likely. For the manufacturing survey, we are slightly more optimistic and believe that the risks are on the upside of expectations. For the first time in seven months, also the German IFO indicator is forecast to show a worsening in economic sentiment. The headline index is expected to drop from 109.9 to 109.4, we believe that a bigger drop is not excluded. In the US, durable goods orders traded very volatile recently, mainly due to the sharp swings in the transportation component. After a sharp 3.9% M/M decline in March, US durable goods orders are expected to show a meagre 0.2% M/M rebound in April. This time, the strength is probably based in the core, excluding transportation, measure which is expected to increase by 0.8% M/M. We believe that both for the headline figure and the details, the risks are on the upside of expectations. In the week ended the 19th of May, US initial jobless claims are forecasted to remain stable at 370 000, for a second consecutive week. Continuing claims, on the contrary, are forecast to drop significantly due to the expiration of extended benefits in some states.
Yesterday, the German Finanzagentur successfully launched a new 2-yr Schatz (€5B 0% Jun2014). It was the first time Germany set a zero percent coupon for debt of such ‘long’ maturity. However, despite this and the record low 0.07% yield, demand was still rather strong and even slightly better than this year’s average at Schatz auctions (€7.74B compared with €7.58B). The bundesbank set aside only 8.9% of the issued volume for secondary market operations compared with 15.52% average this year. In the US, the treasury continued its end of month refinancing operation with a $35B 5-yr note auction. The results were mixed. The bid cover was a little above average (2.99 vs 2.92 avg); but the auction did stop a shade above the 1:00 PM bid side. The buy side figures were also a little light, particularly the direct bid. Today, the US treasury concludes with a $29B 7-yr Note auction. Currently, the WI is trading around 1.18%.
