Bond yields edged higher on Friday on both sides of the Atlantic, with the ultra-long end of the curve seeing the biggest pressure in the aftermath of a weak 30-year auction in the US last Thursday. Intra-Euro-zone bond spreads mostly saw some widening. In the semi-core, Finnish bonds underperformed (see more below). Portuguese bonds saw some profit taking as well, but late on Friday, Moody’s upgraded Portugal from Ba3 to Ba2 and left the new rating on review for a possible further upgrade.
The German 10-year yield seems to be establishing support at around 1.44%, and looks likely to see a rebound higher this week. Yields are set to continue to climb today, as the referendums seen in Ukraine have not led to notable increase in bouts of violence.
The ECB announced on Friday banks would repay EUR 3.7bn of LTROs this week, the second lower weekly number in a row. The Eonia overnight rate has retreated at bit again in the past few days, and Friday’s quote stood at 22bp. Still, the volatility of the overnight rate has already increased notably, and this higher volatility is likely to prevail for now.
Equities saw mixed performance on Friday. Europe ended the day mostly with losses, while in the US, S&P 500 gained 0.15%. Asian equities are trading mixed to higher this morning, and Europe is set to open slightly up.
Increased political uncertainty adding to the risks facing Finnish bonds
The Finnish Social Democratic Party elected a new leader, Antti Rinne, on Friday, which meant that the current Finance Minister Urpilainen had to admit defeat. Mr Rinne has openly criticised some of the decisions taken by the current government, favours more stimulus measures, while he is clearly more leftish in his views compared to Urpilainen. Add to this the fact that Finland will get a new Prime Minister in June, who will most likely be closer to the right wing of the biggest government party compared to the current Prime Minister, and the challenges facing the current government look vast. There is thus a real risk that the government will not be able to achieve anything real during the remainder of its term, if it can even stay together until next spring, when new elections are scheduled. Increased political risks come on top of a weakened rating outlook and the dreadful economic outlook, putting pressure on Finnish bonds.
Euro-zone GDP numbers and US CPI & retail sales data ahead
This week’s calendar does not look hugely interesting, though there are some bright spots. In the US, the highlights include April retail sales tomorrow and inflation numbers for the same month on Thursday. Q1 GDP data, in turn, will be released in the Euro zone and Japan on Thursday. The Bank of England will publish its inflation report on Wednesday.
In today’s calendar, the ECB’s Constâncio and Nowotny will speak at 9:00 CET and the Fed’s Plosser at 18:00 CET.
Plenty of bond auctions ahead
Plenty of action will take place this week on the bond auction front. The Netherlands will re-open its 10-year benchmark for EUR 2 to 3bn tomorrow, Germany will tap its 2018 linker for EUR 1bn, while Italy will launch a new May 2017 for EUR 3.5 to 4.5bn benchmark as well as re-open bonds maturing in 2021 for EUR 1.75 to 2.25bn and in 2034 & 2037 for a combined EUR 0.5 to 1.0bn. Germany will launch a new 2-year benchmark for EUR 5bn on Wednesday, while France will sell shorter bonds and linkers on Thursday. France will re-open nominal bonds maturing in 2016, 2017 and 2019 for EUR 7 to 8bn and three linkers for EUR 1.0 to 1.5bn.
Nordea