Bonds rallied on both sides of the Atlantic yesterday, as the messages in the Bank of England minutes and following the Fed’s meeting were less hawkish than feared. Curves bull-flattened. The US 10-year yield plummeted by 7bp, a bit more than the jump seen in the previous day.
In the bigger picture, the German 10-year yield has stabilized at low levels between 1.30 – 1.45%, while the US 10-year yield has struggled to rise above the 2.60 – 2.65% area. There thus still continues to be clear resistance against a rise in yields, but improving US data and rising inflation should gradually change that picture over the summer.
German yields are set to open lower today, but the drop should moderate during the rest of the day. Market activity will be limited to some extent by the German Corpus Christi holiday (only a holiday in some German states).
Intra-Euro-zone spreads narrowed a bit in the semi-core names, but profit taking was seen outside the semi-core, where Spanish auctions put some pressure on the market.
The Eonia overnight rate fell to a new record low of 1.5bp, but thus remained in positive territory. The zero-boundary will be tested further in the coming days.
Equities were close to flat in Europe but rose in the US. S&P 500 closed the day with a 0.77% gain and reached new record highs. Asian markets are trading mostly slightly higher this morning, and also European equities will open higher.
Fed more pessimistic about the longer-term US outlook
The Fed expectedly delivered another USD 10bn tapering move yesterday, while it made only little changes to its statement. It lowered its GDP growth forecast for this year, but the forecasts for 2015 and 2016 were left unchanged, while the forecast for potential growth was revised slightly lower. The Fed’s inflation forecasts did not contain big changes.
Regarding the rate path, the median forecast for end-2015 moved slightly higher from 1.0% to 1.125% and from 2.25% to 2.5% by end-2016. However, the estimate for the neutral level was lowered from 4% to 3.75%, illustrating the Fed has become more pessimistic about the longer-term outlook of the US economy.
In general, the Fed did not give big new signals yesterday, and clearly needs more data before it will turn more hawkish. Such data should materialize during the summer, as also the inflation picture is likely to show more signs of price pressures picking up.
Cyprus sees good demand for its new benchmark
Cyprus raised EUR 0.75bn in 5-year bonds yesterday in its first post-bailout syndicated bond. Order books were reported to have totalled around EUR 2bn, nothing compared to e.g. the demand gathered by Greece, but Cyprus is a very small country. The yield on the bonds was 4.85%, lower than the initial price talks of around 5%, an illustration of good demand.
US jobless claims, the Philly Fed and the Eurogroup meeting ahead
Even though much of today will be spent digesting the Fed’s message from yesterday, the data calendar is not totally empty either. UK May retail sales will be released at 10:30 CET, US weekly jobless claims at 14:30 CET and the Philadelphia Fed manufacturing index at 16:00 CET.
The Eurogroup of Euro-zone finance ministers, in turn, will meet to discuss Lithuania’s euro accession, the Commission’s recommendations to member states on fiscal and economic policy as well as the progress of Cyprus in its aid programme. The meeting will start at 15:00 CET, and should not produce any market-moving messages.
In addition, the ECB’s Constâncio will speak at 13:15 CET and Costa at 18:45 CET.
New French 5-year benchmark and US supply
France will launch a new 5-year benchmark today, maturing in October 2019, as well as re-open its October 2016 bond for a combined EUR 7 to 8bn. The US, in turn, will offer 30-year TIPS for USD 7bn.
Nordea