Bonds continued to perform yesterday. Yields fell and curves bull-flattened. The German 10-year yield edged back below 1.20%, while the US 10-year yield retreated by around 2bp, approaching 2.50%.
Intra-Euro-zone bond spreads continued to narrow, and especially Portuguese bonds rallied hard, as worries towards the Portuguese banking sector eased further. The Portuguese 10-year yield plummeted by some 9bp. The yield has now fallen by around 30bp from its highs last week, while it remains some 15bp higher compared to where it started last week.
The demand for bonds continues to be strong, with core bonds making gains even on days of strong equity gains like yesterday. Yields are set to continue to head lower today.
Especially European equity markets rallied yesterday, with the main indices up by almost 1.5%. Italian and Portuguese markets gained around 3%. In the US, S&P 500 advanced a more modest 0.42%, leaving the index a touch shy of its record high, while the Dow Jones Industrial Average hit another record. Asian equities are trading mostly lower this morning, and also European equities are set to open down.
Fresh sanctions on Russia taking a toll on already weak economies
The US and EU announced a new round of sanctions on Russia yesterday. The US sanctions target individual firms, but stop short of sectoral measures. The EU will also expand its sanctions, but did not release the new list of companies and individuals involved. The EU also requested the European Investment Bank to suspend new financing operations in Russia and considers the suspension of EU bilateral and regional co-operation programmes in Russia. President Putin expectedly denounced the new measures and warned they would have a boomerang effect.
The new round of measures will put further strains on the relations between Russia and the EU and especially the US, whose sanctions are harsher than those introduced by the EU. It is already very clear that the measures will take their toll on the economies of the relevant countries at a time, when these economies are not exactly doing great to begin with. Even harsher sanctions going forward are likely, but as the latest round suggests, all sides would rather proceed carefully than take big leaps in the severity of the measures taken. The Russian / Ukrainian conflict is just one of the numerous sources of geopolitical concerns, which will keep core bonds supported for now.
EU leaders fail to agree on top posts
Yesterday’s EU summit did not manage to agree on any of the top posts, the President of the European Council, the High Representative of foreign policy and the President of the Eurogroup. This was the latest reminder of how hard reaching decisions in the 28-country EU is. Another attempt will be made in six weeks. At least there was an agreement on something at the meeting this time, as new targeted measures on Russia were announced, while the EU urged the pursuit of a two-state solution in the Israeli-Palestinian conflict .
Final Euro-zone inflation and US construction data ahead
Low inflation has become such an important topic in the Euro zone that even final inflation numbers receive considerable attention. The numbers are not revised that often compared to the flash estimate: since the start of 2012, the numbers have been revised four times. The confirmation of the flash estimate looks likely, but considering the current weak momentum of inflation, risks are tilted towards a downward revision. Such a revision would also have potential to give bonds a further boost. The numbers will be released at 11:00 CET.
In the US, June housing starts and building permits as well as weekly jobless claims will all be out at 14:30 CET, while the Philadelphia Fed manufacturing index will have its turn at 16:00 CET. In addition, the Fed’s Bullard will speak at 19:35 CET.
Spanish and French supply
Today will be the busiest day of the week on the supply front. Spain will re-open bonds maturing in 2017, 2022 and 2032 for a combined EUR 2 to 3bn. France, in turn, will sell 2-, 4- and 4-year nominal bonds for a combined EUR 7.5 to 8.5bn as well as inflation-linkers maturing in 2018, 2021 and 2024 for EUR 1 to 1.5bn.
Nordea