A huge bond rally took place yesterday, especially in the US, with curves bull-flattening and equities taking a beating. The US 10-year yield plunged by more than 10bp to below 2.40%, while the German 10-year yield plummeted by close to 5bp to around 90bp, only around 3bp above the record lows. The Eonia overnight rate made a new low of -3.2bp.
Intra-Euro-area spreads narrowed despite weak risk appetite. Greek bonds led the rally on the back of expectations of more support from the ECB, and these moves are likely to continue today.
Fresh supply is set to put some upward pressure on core yields this morning, and some profit taking is likely to take yields somewhat higher also in the afternoon after the ECB.
Equities took a beating. European markets in general managed to limit losses to less than 1%, but in the US S&P 500 tanked by 1.32%. The equity market is clearly finally feeling pressure, and more weakness could easily give bonds another boost despite already low yield levels. Asian markets are trading lower this morning as well, but outside Japan the losses have been rather contained. Europe is still set to open lower.
PMIs losing altitude – US ADP with a more positive message
Yesterday’s manufacturing PMI data was disappointing, adding to fears global growth momentum would be weakening. In the US, the manufacturing ISM index dipped from 59.0 to 56.6, though still leaving confidence at a rather healthy level. The new orders index saw an even bigger fall, but remains at a high 60-point level. The Euro-area manufacturing PMI was revised lower from 50.5 to 50.3, with Germany dipping below 50 for the first time in 15 months. UK manufacturing PMI disappointed as well with drop from 52.2 to 51.6.
The US ADP employment survey was brighter, coming in at 213k vs 202k the month before and supporting a rebound in payrolls growth, but this data received less attention.
Details, details…
After new purchase programmes were announced by the ECB in September, new details are expected today at 14:30 CET (the monetary policy announcement at 13:45 CET should not offer anything new). The ECB is likely to stop short of announcing an exact target volume for the purchases, but the issue of whether riskier ABS tranches will be included is an interesting one – especially as Germany and France reportedly oppose offering guarantees for such purchases. In addition, more information on the ECB’s shift to actively pursue balance sheet growth will be interesting.
Draghi will no doubt need to sound dovish, but at the same time optimistic about the potential of the announced easing measures. His message should thus keep the bond market shielded from bigger losses, but some profit taking may be seen after the meeting, especially in longer bonds in light of the recent rally.
Elsewhere in the calendar, US weekly jobless claims will be released at 14:30 CET and US August factory orders at 16:00 CET. In addition, the Fed’s Dudley will speak at 18:00 CET and Lockhart at 19:00 CET, while the ECB will release next week’s LTRO repayments already today at 12:00 CET.
Spanish and French supply
Spain and France will complete this week’s EUR government bond supply today. Spain will re-open bonds maturing in 2020 and 2024 for a total of EUR 2.5 to 3.5bn, while France will offer 2023, 2024 and 2027 bonds for a combined EUR 7 to 8bn. These auctions are set to put some upward pressure on yields this morning.
Nordea