Core bonds felt some pressure early on Friday, but buyers later entered the market, driving yields lower. Both the US and German 10-year yields fell by some 4bp.
Intra-Euro-area spreads narrowed across the board on Friday. Spanish bonds outperformed Italian ones in the aftermath of the no-vote from Scotland. The rumoured French downgrade did not happen, and Moody’s still has a negative outlook on its Aa1 French rating.
Core yields are likely to fall some more today, and spreads narrow further.
European equities ended Friday with small gains, while in the US S&P 500 closed marginally lower. Asian markets have started the new week on a negative footing, and also Europe is set to open lower.
ECB trying to reassure after the disappointing first TLTRO
The ECB’s Visco said inflation expectations need to be back where they were, but that did not mean more easing measures would be needed at this point. He said the notion of the TLTROs being a major failure was a misunderstanding, as the second tranche was more important than the first. He also admitted covered bond purchases had been added to the mix of bond purchase to increase the size of the programme, even though there was no market failure as far as covered bonds were concerned.
The ECB’s Executive Board member Cœuré, in turn, said no country or international organization had asked the ECB to do more at the G20 meeting, while it was way too early to tell the effect of the announced measures. In case the announced measures would not be enough, the ECB would do more.
It is easy to agree with the ECB’s view that the second TLTRO will be larger compared to the disappointing first one. Still, expectations that the ECB will have to do even more are likely to continue to increase going forward.
Increasing excess liquidity to push the overnight rate into negative territory againThe ECB announced on Friday that banks will repay just below EUR 20bn of 3-year LTROs this week. This means that the net liquidity injection from the first TLTRO is likely to be in the order of EUR 60bn, though the exact picture will be known only after this week’s refinancing operations. This injection should be sufficient to push the overnight rate back into negative territory later this week.
PMI week ahead – Draghi to speak today
The highlights in this week’s data calendar are the Euro-area flash PMIs for September, out tomorrow. After the marked fall in August, expectations are for small changes this time. Another setback would further boost ECB easing expectations. The German Ifo, in turn, will be out on Wednesday and August credit data on Thursday.
In the US, the preliminary September Markit manufacturing PMI will be released tomorrow, August new home sales on Wednesday and durable goods orders for the same month on Thursday.
In China, the flash September HSBC/Markit manufacturing PMI will be out early tomorrow.
In today’s calendar, the highlight will be ECB President Draghi’s testimony to the European Parliament’s Economic and Monetary Committee at 15:00 CET. In addition, the ECB’s Praet will speak at 12:00 CET, US August existing home sales and Euro-area September consumer confidence will be released at 16:00 CET, while the Fed’s Dudley will speak at 16:05 CET.
On the ratings front, Standard & Poor’s has its ratings review date for Austria and Fitch for Finland on Friday.
Belgian auctions setting the issuance week in motion
Belgium will start this week’s bond issuance today with re-openings on bonds maturing in 2024 and 2034 for EUR 1.5 to 2bn. Later in the week, Italy will sell inflation-linkers and zero-coupon bonds on Thursday. In addition, the Netherlands is planning to launch a new 5-year benchmark during the week.
In the US, USD 29bn of 2-year notes will be sold tomorrow, USD 13bn of 2-year floating-rate notes & USD 35bn of 5-year notes on Wednesday and USD 29bn of 7-year notes on Thursday.
Coupon and redemption payments from EUR government bonds will provide a boost of around EUR 15bn this week. These will stem mainly from French bonds.
Nordea