Bonds rallied big-time yesterday in the aftermath of dovish Fed minutes and disappointing Chinese data. German 10-year yield plummeted by some 5bp, the corresponding US yield by 4bp. Curves bull-flattened. Intra-Euro-zone spreads mostly widened outside the semi-core, but quite little considering the big drop in core yields (yields in general fell also outside the core).
European equities already felt some pressure, but the big hits came in the US. S&P 500 plunged by 2.09%, hitting its lowest levels since February. Also Asian equities are trading lower this morning, and Europe is set to open further down.
The German 10-year yield is preparing for another attack at the important support at 1.50%, and a break lower looks likely in the near future. However, today we are likely to see some profit taking after the good performance seen lately, and yields could actually correct slightly higher.
Finnish credit rating starting to feel pressure – more pressure for the shaky government
The credit rating agency Standard & Poor’s surprisingly changed its outlook for the AAA rating of Finland from stable to negative, the first major rating agency to do so. The agency cited Finland’s protracted economic stagnation, affected by structural demographic and economic imbalances that hamper the government’s efforts to achieve fiscal consolidation, while the economy remains vulnerability to any slowdown of economic activity in the Euro zone or among other major trading partners such as Russia.
No downgrade looks likely for some time still, and S&P itself noted the negative outlook reflects their view that there is at least a one-in-three chance of lowering the ratings within the next 24 months. However, the negative outlook plainly puts more pressure on the already shaky Finnish government. The recent decisions taken by the government on further austerity and structural measures have clearly not convinced S&P, and more measures are needed, if the government wants to secure Finnish AAA-ratings, something the government values very highly. The negative outlook is certainly not welcome, as the Prime Minister will step down in the summer, the leader of the second largest government party may lose her position in a month, the Greens are pondering whether they can stay in the government, while the Left Alliance left the government just last month.
Credit ratings are very important for Finnish bonds, as Finland is a small country, whose bonds are owned mostly by foreign investors. Even though a downgrade is not around the corner, the negative outlook questions Finland’s ability to hold on to its AAA-ratings, and at a minimum should put pressure on Finnish bonds, warranting caution. Finnish politicians usually are able to make hard decisions under pressure that may eventually succeed in preventing a downgrade. Still, in the short-term, it will be very difficult for the government to convince this will happen.
Huge demand for the new Greek benchmark
Order books amounted to more than EUR 20bn for the new Greek benchmark, which was priced at a yield of 4.95% in EUR 3bn size. Foreign investor participation was reported to have been close to 90%. The successful issue was a very encouraging first step in Greece’s return to bond markets, but full reliance on market funding remains far away. In the current environment, the pick-up and scarcity value offered by the new Greek bond looked attractive to many investors, but if the country would start issuing in size, all that would change. The Greek 10-year yield actually edged higher yesterday, implying the demand for the new bond did not spur a further rally in Greek bonds. That said, in a world of adamant search for pick-up amidst low core yields, also Greek bonds should have more performance potential left.
IMF Spring meetings and bank earnings ahead
Today’s data calendar does not look hugely interesting either. US March PPI will be released at 14:30 CET and preliminary April University of Michigan consumer confidence at 15:55 CET.
The ECB, in turn, will announce the next week’s LTRO repayment data at 12:00 CET. The IMF and World Bank Spring meetings will take place over the weekend, including appearances by e.g. the ECB’s Draghi & Cœuré as well as the Fed’s Stein.
In addition, the rating agency DBRS has a chance to review its ratings on Spain and Italy, something that may affect their haircuts in ECB’s refinancing operations. JPMorgan Chase and Wells Fargo, in turn, will set Q1 bank earnings releases in motion in the afternoon.
Italian auctions concluding a busy supply week
A lot of supply has been seen this week, but it is not over yet. Italy will re-open 3-year BTPs for EUR 3 to 3.5bn, 7-year BTPs for EUR 2 to 2.5bn and 30-year BTPs for EUR 0.75 to 1.25bn.
Nordea