German bonds rallied yesterday already before the 7-1 massacre Germany delivered vs Brazil in the World Cup. More profit taking in the equity markets as well as geopolitical tensions boosted bonds, and curves bull-flattened. The German 10-year yield sank around 4bp to just 1.22%, the lowest in more than a year and not that far away from the record lows of 1.13% seen in 2012. The front contract of the Bund future has already reached record highs.
Bonds rallied even more in the US, where the 10-year yield plummeted by almost 6bp back below 2.60%, though this still leaves the yield at higher levels than seen just over a week ago.
Clear profit taking was seen also in Euro-zone government bonds outside the semi-core. E.g. Italian and Spanish 10-year spreads vs Germany widened by 7-8bp. These moves may have some more to run in the short term, but the widening in spreads should be seen as a buying opportunity.
Despite the big rally seen yesterday, core bond yields should have more room to fall today. Geopolitical tensions now also include a heated situation between Israel and the Palestinians, while more dovish central bank rhetoric, equity weakness and favourable cash flows should support bonds as well.
Equities took a beating yesterday. S&P 500 fell by 0.70%, while European indices plummeted by more than 1%. Greek equities plunged by almost 4%. Asian equities are also trading with losses this morning, but the moves have mostly been modest compared to those seen in Europe yesterday. European equities are set to open slightly lower, and more losses could easily be in the cards today.
State-guarantees not honoured in Austria
The Austrian parliament approved a law yesterday that will impose losses on holders of state-guaranteed debt owed by the nationalized Hypo Alpe-Adria-Bank International. The new law involves bypassing guarantees by the state of Carinthia and imposing losses on subordinated creditors, but the holders of senior bonds were spared, something the opposition in the Austrian parliament criticised heavily.
The compromise certainly carries risks for the government: imposing losses only on subordinated creditors still leaves major costs for the taxpayers to bear, while not honouring the state-guarantees risks denting trust towards such debt going forward. Clearly, the topic of how deal with troubled banks remains a sensitive topic, and how such cases are addressed going forward will receive a lot of attention.
US small businesses not doing that great after all
After three straight months of increases that left the NFIB small business optimism index at its highest level since 2007, confidence fell back from 96.6 to 95.0 in June. Nevertheless, that still marks the second highest reading since 2007. The report was not all negative, since the indices measuring plans to increase employment and current job openings both increased, but capital outlays, planned spending and future expectations all retreated. In general, small businesses remain much more pessimistic than larger companies, and have yet to feel a real recovery.
Fed minutes and ECB speakers to retain a dovish tone
Today’s Fed minutes (at 20:00 CET) should shed more light into why the forecasts of the FOMC participants showed a small increase in the expected tightening pace in 2016, while the longer-term median forecast for the fed funds rate fell some. The minutes in general should maintain a rather dovish stance, but considering that e.g. the 10-year yield is already lower than before the latest Fed meeting, the minutes should not really boost bonds further.
In the Euro zone, several ECB Governing Council members will speak, and their comments should continue to support the bond market. Cœuré will be first at 8:10 CET, Praet will have his turn at 9:00 CET, while Draghi himself will appear at 20:30 CET. All of these speeches should have a clearly dovish tone.
US and German auctions ahead
Action will continue on the auction front today. Germany will re-open its 2-year benchmark for EUR 4bn, while USD 21bn of 10-year notes will be sold in the US.
Nordea