Markets: Fixed Income
On Wednesday, US equities declined on rising concerns about
the future of GM and increasing fears that the sharp rise in
longer-term US yields would choke the economic recovery hopes.
GM shares fell sharply, as the carmaker moved ever closer towards
bankruptcy filing following a failed debt exchange. Most attention
however went out to the Treasury market, where, despite a strong 5-year
Note auction, the sell-off continued. The sell-off was mainly due to
mortgage related selling, as the recent sharp rise in Treasury yields
forces ever more investors to sell Treasuries they had bought as hedges
against the risk homeowners would refinance mortgages at lower rates.
The refinancing of mortgages may however slow sharply due to the sharp
rise in yields, which may in turn hurt any recovery of the housing
In response, there was a sharp bear steepening of the US
yield, as technical selling accelerated the rise in US longer-term
yields. US 5-, 10- and 30-year yields rose respectively by
13.3, 19.1 and 14.1 basis points compared to a rise of 6.2 basis points
in 2-year yields. As a result, the 2/10 year yield spread hit a new
all-time high at 276 basis points. The swap spread also widened
In the euro zone, the sell-off on the US Treasury
is reflected in the sharply lower opening of the European bond market
this morning. Yesterday’s German, Italian and Portuguese auctions were
however well received.
German 10-year yields test key longer-term resistance
Today, the calendar is well-filled both in the euro zone and in the US. In the euro zone, the calendar contains the European Commission confidence indicators
(May), Belgian and Spanish CPI (May) and the German unemployment data
(May). Last month, the European Commission confidence indicators showed
their first improvement after falling to a record low in March. For
this month, another (slight) increase (69.0 from 67.2) is expected. We
believe the risks might be on the upside of expectations after the
better than expected PMI’s and national business confidence indicators.
In line with the German CPI yesterday, also Spanish and Belgian CPI are
expected to extend their downward trend and the risks might be somewhat
on the downside of expectations. The German unemployment rate is forecasted to rise further in May (to 8.4%).
In the US, the durables (April), new home sales (April) and weekly claims are on the agenda. In April, durable goods orders
are expected to have risen by 0.5% M/M after falling by 0.8% M/M in
March. Nevertheless, the improvement might be driven by civilian
aircraft orders and therefore, durables ex transportations are expected
to have dropped further in April. New home sales are forecasted to show
a slight increase (1.1% M/M) in April, partially due to the California
new-home buyers’ tax credit. Initial claims are expected to have stayed broadly unchanged in the week ended May 23.
On the supply front, Italy will tap two BTPs in
the 3- and 10-year sector and two CCTs in 3- and 6-year sector for a
total amount between €6.75-9.25B, while in the US, the Treasury will
hold a 7-year Note auction for an amount of $26B.
Yesterday, Germany successfully issued a new 2-year Schatz. The
bid/cover ratio was good at 1.9, even though the Bundesbank had to
retain the largest amount (1.68B) since November last year. Yesterday,
Portugal also issued a new 5-year benchmark via syndication. The new
benchmark maturing in October 2014 was priced at 67 basis points above
mid-swap. In February of this year, Portugal still had to pay a spread
of 135 basis points above Swap, when it issued its new 10-year
benchmark. The decline in the intra-EMU spreads mainly reflects the
improvement in risk appetite, as the outlook for public finances still
looks rather awful.
On the ECB front, several ECB council members will speak today, including Constancio, Liikanen, Weber and Tumpel-Gugerell.
We don’t expect them to break new ground, as ECB President Trichet has
signalled that rates will remain unchanged for now and no new
unconventional measures are anticipated.
Regarding trading, the sell-off on the government
bond market continued yesterday in the US, where longer-term yields
moved again higher forcing ever more investors to reposition and sell
Treasuries. The move came that far, that it now starts to threaten the
economic recovery hopes. Yesterday, US equities for the first time fell
on the continuous rise in US Treasury yields. In the euro zone,
longer-term yields are moving higher too and German 10-year yields have
already broken above the January highs at 3.4%. Next key resistance
stands at 3.67%, which is the neckline of a major double top formation
(see graph below). And a sustained break above this level
would suggest that we are heading for a crash on the bond markets and
in this case, we would close any long position on bonds. We
are however not that far yet, and if the rise in yields would indeed
threaten the recovery, the rise in yields may naturally run out of
In the UK, Gilts underperformed the European bond market following the Bank of England’s reverse auction.
Today, the calendar contains the CBI distributive trades report.
Last month, the CBI report showed an impressive rebound in sales (3
from -44), which was at least partially related to the timing of
Easter. For this reason, sales are forecasted to have fallen back
somewhat in May.KBC Bank