German bond yields edged lower on Friday in low-volume trading, as the US markets were on holiday. The German 10-year yield ended the day lower by some 2bp. Intra-Euro-zone spreads widened a bit outside the semi-core.
Yields are likely to trade with a small upward bias today, as safety flow ebbs. Ukraine’s army has scored victories over the rebels over the weekend, while Russia has kept its distance.
European equities mostly felt some pressure on Friday, and Asian markets are trading with small losses this morning. Still, Europe is set to open close to flat.
Finally risk weights for sovereign bonds?
The Wall Street Journal reports, citing people familiar with the discussions that the Basel Committee is considering reducing the latitude of banks in calculating the risk weights of their own assets, including ending the treatment of automatically categorizing sovereign bonds as risk-free. The zero risk weights received a lot of controversy especially around the Greek sovereign default in 2012. The practice has already changed in many ways, as sovereign holdings have been part of earlier stress tests, while e.g. the Belgian central bank has reportedly asked Belgian banks to change the practice of zero risk weights. As domestic banks are major buyers of government bonds in many countries, big changes to the risk weights could cause a shock, which is the reason why major changes look unlikely. That said, even more modest changes would put some upside pressure for the bond yields of the riskier countries.
Not much in the calendar to get excited about – Q2 earnings season to start
After a lot of action last week, this week’s calendar looks quite light. German May industrial production numbers will be released today at 8:00 CET, Fed minutes and Chinese June inflation on Wednesday and trade data for the same month on Thursday. In addition, the Eurogroup will meet today at 15:00 CET, the ECB’s Draghi will speak on Wednesday, and the Bank of England will announce its latest monetary policy decision on Thursday.
Further, the Q2 corporate earnings season will be set in motion by Alcoa tomorrow, but the pace will really pick up only next week.
Plenty of action on the auction front – another boost from coupons and redemptions
While the economic data calendar looks dull, the supply calendar does not, as there will be a flood of issuance. The Netherlands will re-open its 10-year benchmark for EUR 1.5 to 2.5bn tomorrow, Austria will auction bonds maturing in 2024 & 2044 for a combined EUR 1.1bn, while Germany will tap its 2018 linker for EUR 1bn. Germany will continue with a EUR 4bn 2-year re-opening on Wednesday, Ireland will sell bonds on Thursday and Italy on Friday. In addition, Greece is expected to sell 3-year bonds for EUR 2 to 3bn during the week.
In the US, USD 27bn of 3-year notes will be sold tomorrow, USD 21bn of 10-year notes on Wednesday and USD 13bn of 30-year bonds on Thursday.
Another boost from EUR government bond coupon and redemption payments is already in sight. A massive EUR 57bn of coupons and redemptions from French, Austrian and Dutch bonds will be in store early next week, which should support the bond market already this week.
Nordea