After three days of huge bond rallies, yields finally found some support on Friday. The German 10-year yield rebounded by around 2bp, while the corresponding move in the US was some 3bp. After a volatile day, intra-Euro-zone spreads mostly snapped narrower.
Core bonds are likely to remain supported this week and spreads under widening pressure, as upcoming elections represent sources of uncertainty (see more below). No big rebound higher in yields is thus ahead in the near future, though also the biggest rally should be behind for now.
Equity markets mostly rebounded as well, but the moves were limited. S&P 500 ended the day higher by 0.37%. Asian equities, however, are trading mostly lower again this morning, while Europe is set to open roughly flat.
The ratings agency Moody’s upgraded its rating on Ireland by two notches to Baa1 on Friday, putting its rating at par with the other two major ratings agencies. The outlook for the new rating is stable. DBRS, in turn, affirmed its stable outlook on the Finnish AAA rating.
Positioning no longer an obstacle to a move higher in yields
CFTC data released on Friday showed short positions in US 10-year T-note futures and options were pared significantly. In fact, if one looks at large traders only, the net positioning turned long for the first time in a year, when excluding individual weeks of modestly positive numbers. In addition, the data reported on Friday is as of last Tuesday, when the US 10-year yield stood some 10bp higher than currently. Current long positions should thus be higher compared to the latest reported data.
Having been short for a long time, short positions now appear to have been taken out, and positioning should not be an obstacle for another attack higher in yields. Such a move is unlikely to happen in the very near future, as political uncertainty remains large (see more below), but US markets are likely to lead longer yields higher during the summer.
Euro-zone PMI data and big political risks ahead
The highlight of the week in terms of economic data releases will be the May flash PMIs for the Euro zone on Thursday. However, this data is unlikely to change the ECB outlook: more easing will be announced in June.
Elsewhere in this week’s calendar, Fed minutes will be released on Wednesday, the Markit flash manufacturing PMIs for China and the US, along with US April existing home sales on Thursday and the German Ifo & US April new home sales on Friday.
Political uncertainty should limit risk appetite and keep bond yields depressed this week. Ukraine will elect a new president on Sunday (25th May), while European Parliamentary elections will take place from 22nd to 25th May.
Today’s calendar looks rather light, though central bank speeches will continue. The ECB’s Weidmann will speak at 9:00 CET, Mersch at 10:00 CET, Cœuré at 11:30 CET, the Fed’s Williams and Fisher at 18:10 CET, the former Fed Chairman Bernanke at 18:50 CET and the ECB’s Nowotny at 19:00 CET.
New German 10-year benchmark and Finnish supply ahead
After last week’s heavy supply, plenty of bond auctions will take place this week as well. Belgium will set the week’s auctions in motion today, as it will re-open bonds maturing in 2019 and 2024 for a combined EUR 1.5 to 2.0bn. Finland, in turn, will tap bonds maturing in 2024 and 2042 for a maximum of EUR 1.5bn tomorrow. Germany will auction a new 10-year benchmark for EUR 5bn on Wednesday. Finally, Spain will sell bonds maturing in 2019 and 2024 on Thursday.
Nordea