Bonds rallied in earnest yesterday on both sides of the Atlantic on the back of disappointing US retail sales and reports that the Bundesbank would back more ECB easing. Curves bull-flattened. The German 10-year yield fell by 4bp to its lowest in almost a year, while the US 10-year yield plummeted by 5bp, which only brought it back to levels seen last Friday.
Intra-Euro-zone spreads continued to see widening pressure, though the moves were not huge. Finnish bonds remained under pressure, and this pressure is likely to continue going forward.
After yesterday’s bond rally, yields are likely to trade with a small upward bias today, especially as the ECB speeches in store may not take as dovish a stance as hoped based on yesterday’s reports.
Equities produced some more gains. In the US, S&P 500 rose above 1900 index points for the first time ever, but pared most of its earlier gains later to end the day up by only 0.04%. Asian equities are trading mixed this morning, while Europe is set to open slightly higher.
In FX markets, EUR/USD sank below 1.37 already (though has rebounded back above this level again), a sharp move from the almost 1.40 level seen last week. These moves should please the ECB.
Bundesbank on board in terms of more ECB easing
The Wall Street Journal reported yesterday, citing a person familiar with the matter, that the Bundesbank was willing to back an array of stimulus measures, if the ECB staff forecasts showed a downward revision to 2016 inflation. The measures backed reportedly include reductions to refinancing and deposit rates, extensions of unlimited loans to banks, new long-term loans to banks at a capped rate and some purchases of asset-backed securities. However, the story continues the Bundesbank remains resistant to large-scale purchases of public and private debt, since bond yields were already low, while the purchases would not do much good and could instead create financial stability risks.
Less obstacles for the US housing market recovery
Mel Watt, the new Director of the Federal Housing Finance Agency, said he sought to use Freddie Mac and Fannie Mae to make it easier for Americans to get mortgages, a very different stance compared to his predecessor, who sought to limit the role of the two agencies. According to The Wall Street Journal, also other federal regulators and the Obama administration are backtracking on efforts to tighten mortgage lending standards amid concern such measures could seriously dent the recovery ongoing on the housing market. Considering the headwinds the housing recovery already appears to be facing due to higher rates, such a stance would certainly be good news for the recovery. At the same time, it also suggests the bigger reforms on how the US mortgage market operates will have to wait.
Huge demand for Spanish bonds continuing
Investors raced to buy the new Spanish 10-year inflation linker. Orders for the new bond amounted to above EUR 20bn, and the size of the issue was fixed at EUR 5bn, ten times the minimum amount initially mentioned. This was the first linker from Spain, explaining the huge demand to some extent, but it is safe to say also in general that the appetite for Spanish bonds has not run out yet, despite the huge fall seen in yields. 73% of the issue reportedly went to non-resident investors.
More ECB speeches and the Bank of England Inflation report
More ECB speeches will be on the agenda today. The ECB’s Mersch will speak at 9:45 CET and Mr Weidmann at 16:30 CET.
The Bank of England, in turn, will release its inflation report at 10:30 CET, which will likely include downward revisions to inflation forecasts, but growth forecasts may be revised upwards, tempering the message.
On the economic data front, Euro-zone March industrial production will see daylight at 11:00 CET.
New 2-year benchmark from Germany
Euro-zone bond auctions will continue today with Germany. The country will launch a new 2-year benchmark, BKO 0.25% Jun 2016, for EUR 5bn.
Nordea