Bonds took a beating yesterday on both sides of the Atlantic, though the pressure eased somewhat especially in Europe towards the evening. The German 10-year yield ended the day higher by some 4bp, while the corresponding US yield climbed by 3bp. Intra-Euro-area spreads widened, with especially Spanish bonds under pressure.
The recent rise in yields will be a good test of the underlying bond market sentiment. In the recent past, even a small rise in yields has quickly attracted new buying. This looks likely today as well, and yields are set to edge back lower.
Equities took more losses yesterday, with e.g. S&P 500 ending the day lower by 0.65%. Asian markets are trading lower this morning (apart from Japan), while Europe is set to open slightly down as well.
Germany rejects deficit spending – also against giving guarantees to ECB ABS purchases
German Finance Minister Schäuble said yesterday growth and jobs would not come via higher deficits, and only innovation, structural reforms, investment and trust in the sustainability of public finances would help. He added Germany would not take the path of raising deficits to try to boost growth. There is nothing new in these comments, but coming after the ECB’s Draghi called for a more growth-friendly composition of fiscal policies, Mr Schäuble confirmed Draghi’s comments have not done anything to make Germany change its stance.
Schäuble also said he was working with his French counterpart on ways to create a market for asset-backed securities that would be strong enough to survive also without the support from the ECB. Bloomberg reports Germany and France reject the ECB’s suggestion that governments should back the ABS purchases with guarantees, as investors should be incentivized to scrutinize the securitizations and not rely on a guarantee. If no guarantees are given and the ECB does not buy the riskier tranches of ABSs at all, the effectiveness of the purchases will be significantly weakened. The ECB’s Liikanen, in turn, confirmed the ECB had not made any decisions yet on the size of the announced purchase programmes.
Spanish bonds feeling the heat from the Scottish referendum
In the Euro area, Spanish bonds are the ones most vulnerable to the uncertainty created by the Scottish referendum next week. This is because a yes-vote in Scotland would likely boost the independence endeavour of Catalonia in its vote in November, as also Catalan leader Mas has commented. This was also evident in yesterday’s market reaction: whereas e.g. the Italian 10-year spread to Germany widened by only around 2bp, the Spanish spread expanded by almost 7bp. Spanish bonds are set to continue to underperform Italian ones in the near future.
Central bank speeches and Russian sanctions on the agenda
Economic data offerings continue to be light today, with French July industrial production numbers at 8:45 CET and Spanish data at 9:00 CET. More focus will be on central bank speeches. The ECB’s Nowotny will speak at 13:45 CET, BoE Carney will be presenting the inflation report to the Treasury Select Committee at 15:45 CET, while the ECB’s Mersch will have his turn at 17:00 CET.
In addition, representatives of EU governments will meet again to ponder the question of introducing more sanctions on Russia at 10:00 CET.
10-year issuance from Germany and the US
Today’s issuance will target the 10-year part of the curve on both sides of the Atlantic. Germany will launch a new 10-year benchmark for EUR 5bn, while the US will offer 10-year notes for USD 21bn.
Nordea