The eco data hadn't a noticeable impact on bond markets
International Trading
Markets: Fixed Income
On Monday, in quiet, still holiday-trading, global bonds moved mostly sideways. The few noticeable moves were driven by the sparse gyrations in equities. In EMU, German Bunds started the session weak, mirroring a late-session sell-off of Treasuries on Friday. However, the weak opening never developed into a negative trend, as also equities didn’t go far from opening levels. Temporary stronger equities at the US open pushed Bunds and US Treasuries to session lows. However, equities couldn’t hold on to their gains and reverted to opening levels, pushing US Treasuries and Bunds higher in their intra-day trading band. The Bund, who set a new all time high on Friday, ultimately closed the session 13 ticks lower. US Treasury Note future that was hit on Friday by profit taking eked out some insignificant gains. The yield changes across the curve were minimal and the curve movement a bit erratic.
The eco data hadn’t a noticeable impact on bond markets, as they didn’t bring surprises and thus didn’t change the broad economic picture. The EMU PMI was marginally weaker than expected in August, but still pointing to robust growth. In the US, the Chicago National Activity data was weak, but marginally better than expected. It points to the likelihood that the US economy will expand only lacklustre in H2 of 2010, but also this is in line with current market thinking. The $7B 30-yr TIPS reopening went well. The auction stopped at 1.768%, below the bid in the WI (1.779%) and the bid/cover (2.78) was decent. The jump in the Direct bid was the eye-catcher.
In the intra-EMU market, there was little animus in trading either. The 10-year yield spreads versus Germany were marginally wider for Portugal, Ireland and Spain, while slightly narrower for Greece, Italy and Belgium. The latter profited from a strong auction.
Today, the eco calendar is interesting with the US existing home sales, Richmond Fed manufacturing index, euro zone industrial new orders and Belgian business confidence. On the supply front, the US will hold a $37B 2-year T-note auction, while Spain will sell 3- and 6-month T-Bills. Chicago Fed Evans will speak in Indianapolis. On the money market, the allotment in the weekly ECB refinancing tender will get some attention. The NY Fed will buy Treasuries (before 2-year Note auction) in the 02/2013 to 07/2014 sector.
Although the existing home sales might still benefit from the tax credit, which was extended to September 30 for buyers who could not close the contract before June 30 but signed their contract by April 30, a sharp drop is expected in July. After falling by 2.2% M/M (May) and 5.1% M/M (June), US existing home sales are forecasted to have dropped by 13.4% M/M in July. We have no reasons to distance ourselves from the (weak) consensus reading as the pending home sales fell sharply in May and June. The Richmond Fed manufacturing index is expected to drop for the fourth consecutive month in August. The consensus is looking for a decline from 16 to 8 in the headline index. After the sharp drop in the Philadelphia Fed last week, we believe a weaker outcome is not excluded and it would suggest that indeed manufacturing activity is slowing fast. A better-than-expected outcome on the other hand would ease such fears, at least in the run-up to the Chicago PMI and especially the ISM to be released next week. In the euro zone, industrial new orders are expected to have increased for the fifth straight month in June, but at a slower pace (1.5% M/M from 3.8% M/M).
The Belgian OLO auction went very well. The Belgian debt Agency sold €2.75B of paper in three lines (March 2013, Sept 2020 and March 2022). Yields were well below those at the previous auctions. The average yield on the Sept 2020 amounted to only 2.929%, the lowest ever. Demand was strong with decent bid/covers and the tail was rather small. Yield spreads with benchmark Germany narrowed slightly following the auction. The German Finance Agency sold €3.56B of its new 12-month Bubills at an average yield of 0.4995%. Today, Spain will sell T-Bills, but more interestingly will be the $37B US 2-year T-Note auction. The latter will raise $5B in fresh cash, but will be followed tomorrow and Thursday by a $36B 5-yr and a $29B 7-yr Note auction that raises all new cash. The 2- and 5-year auctions are $1B smaller than in July. Despite the high issuance, the Treasury has easily found enough buyers for its debt and with the size starting to become smaller; there is little risk of insufficient demand. The uncertainties for this auction reside in the holiday-thinned market and in the very low yield. So while the bidding may be a bit more sloppy than recent, there are no indications the auction would encounter big problems.
The WSJ website runs an interesting article on the August FOMC meeting at which the Fed decided to replace its maturing MBS securities by buying Treasuries with the objective to keep the size of its portfolio (and balance sheet) stable. Only one governor, Hoenig, explicitly dissented, but the WSJ reveals that there was much more resistance against the decision around the table. According to the newspaper, at least 7 of the 17 Fed officials spoke against the proposal or expressed reservations. This suggests that Bernanke may encounter more resistance if he would propose an expansion of the Fed portfolio. Of course, much will depend on the economic circumstances. If risks of a double dip would rise as does deflation risks, the chairman might still convince his board to go further, but the revelations in the WSJ suggest that the bar to enter an expansion of its portfolio might be higher than thought recently.
Regarding bond trading today, the US data may confirm that growth has slowed appreciably, but are probably not important enough to cause major moves. Similarly, the European data will probably be ignored, as the PMI release yesterday brought timelier information than the EMU orders for June. Also the other items on the calendar are not bond-unfriendly, even if the US 2-year Note auction might ahead of it weigh a bit on the price action, even if this may be compensated by the Fed purchase of Treasuries. Equities could be influential for intra-day movements in bond markets, especially should the S&P revisit the key support area around 1030/10. The technical picture of both the Bund and the Sep. T-Note future are bullish and the fundamentals are favourable too. However, the Bund rallied almost uninterruptedly since late July conquering more than 5 big figures.
The distance of the current price to the medium term average (131.60) is extreme. This makes us nervous about the short term outlook. Profit taking to digest such giant gains looks very likely. Therefore, we advice short term players to consider profit taking on long positions, while longer term players may stay aside and wait for a correction to contemplate new long positions. The obvious key support stands at 129.93 (prev. high, see graph). A break of that level (while currently unlikely) shouldn’t be ignored. Another potential entry level stands at 131.60 (MTMA).
The technical picture of the US Note future is very much the same, even more extreme. The contract rose in a trend-like way since early April, capturing 12 big figures with only very modest intermediate corrections (that kept the trend intact). There is no reason to go against such a strong trend, but given its profile a correction should be nearby. Once more, this should make short term player contemplate to book some profits, while longer-term players could let their positions run and wait for a technical signal that the uptrend is over.
