German bonds continued to perform on Friday, and the curve bull-flattened, while US yields edged slightly up. Intra-Euro-zone spreads narrowed mostly, but the moves were not huge.
Bonds will be supported early this week by more geopolitical tensions, but the Fed’s message may put some upward pressure later in the week (see more below).
Equity markets saw mostly only limited changes on Friday. S&P 500 ended higher by 0.3%, though closed the week with a 0.68% loss. Asian equities are trading mostly down this morning, and also Europe is set to open lower.
No surge in LTRO repayments – excess liquidity to jump
The ECB’s easing package did not lead to at least an immediate surge in 3-month LTRO payments, as these will amount to only around EUR 3.7bn this week. With the knowledge that the LTROs can be rolled into new funding operations later this year, at least to a significant extent, there is less rush to repay now.
Excess liquidity is set to jump this week, as the ECB discontinues the SMP sterilization programme, immediately releasing some EUR 109bn of additional liquidity. As a result, the Eonia overnight rate will seriously start flirting with the zero bound. Considering that the overnight rate fell to a low of 2.6bp already on Friday, at least individual negative levels look likely.
Tough Finnish government negotiations ahead
Alexander Stubb, the current Minister for European Affairs and Foreign Trade, was selected to become the new Prime Minister of Finland. Mini government negotiations will follow this week. In his speech, Mr Stubb signalled some of the decisions already taken by the government could be opened, so the negotiations this week will be more than just a formality.
The new Prime Minister will take the National Coalition Party to the right compared to his predecessor, while the new leader of the second largest government party is clearly more leftish is his views compared to his predecessor. The new government will thus clearly have its work cut out for finding common ground. That said, Mr Stubb was open to reaching a compromise in this week’s negotiations, and he will likely have to wait for the next parliamentary election campaign to really argue his views.
Fed to lift its rate path again?
The highlight in this week’s calendar will be Fed meeting concluding on Wednesday. The Fed could easily once again surprise the markets by lifting its interest forecast, thus favouring a rise in yields. Other points of interest this week include the US May CPI tomorrow, BoE minutes on Wednesday and the Philadelphia Fed manufacturing index on Thursday.
The final May Euro-zone inflation number will be released today at 11:00 CET. Risks are skewed to an even lower number compared to the subdued 0.5% y/y flash estimate print. In other data, the New York Fed manufacturing index will be released at 14:30 CET, US April capital flow data at 15:00 CET, US May industrial production at 15:15 CET and the NAHB housing market index at 16:00 CET.
New 5-year French benchmark out this week
Last week’s heavy supply load still left plenty of issuance for this week as well. Germany will re-open its 10-year benchmark for EUR 5bn on Wednesday, while Spain will re-open bonds maturing in 2017 and 2019 on the same day. France will auction a new 5-year benchmark, as well as re-open a 2-year bond, for a combined EUR 7 to 8bn on Thursday. In the US, USD 7bn of TIPS will be sold on Thursday.
Coupon and redemption payments from EUR government bonds will amount to around EUR 7bn this week. These will stem mainly from Portuguese bonds.
Nordea