- USTs in Tokyo/London: Another grab’athon for Duration out of Asia today. Asian RM seen buying of CT7yr. 5s led for some of the session, but 7s – 10s soon took over. Swaps were quiet. Regional Asian players seen extending duration and buying outright, some moving out of bills and 2s into 3-4yr. Some buying may have occurred in spd product like MBS – no flows reported, as the FOMC statement showed a number of people expressing desires to add MBS, SSA and other quality spreas products. London saw early Asian RM buying again, plus oil money buying of 5s and central bank checking offers in spd product. US 142.14 )+21), TY 131.06 (+13+), FV 131.06 (+6 1/4), TU 110.12 1/4 (+1/2), SP 1324 +3.80, Eur 1.3156 +108
- US 7yr Auction tonight at 18.00GMT/1pm NY: the Treasury will auction $29bn in 7s. The 7y tenor has lagged the 2y and 5y tenors in improvement in demand since August. The b/c ratio has largely oscillated around its previous 12m average, and four of the previous five auctions have tailed, with the one in December tailing by 1.3bp.
- US Fed Ops: The Fed is scheduled to buy $2.5bn in the 20-30y sector- May41s, Feb41s, Feb36s, Aug39s and May39s look the cheapest versus the Treasury spline.
- European Fixed Income: Bunds gapped higher with USTs, running into waves of short-covering in early trade. We high ticked at 138.44- 38.2% retracement and price resistance comes in now at 138.35/45. However, the bid has been faded, BTPs and SPGBs are trading well today, and the Dow Jones piece ‘Private Lenders Accept Lower Interest Rate In Greek Debt Deal’ knocks Bunds lower, down to 137.88. We’ve since recovered on dip buying. Flows today have included good demand for Core 5yr paper, better selling in 2yr, but it’s been pretty quiet in 10yr. The BTP Linker auction (BTPei 09/14s) went very well- 2.79 b/c with the bond coming 50 bps thru. The issue rallied 17bps into the bidding deadline this morning- there’s been talk in the market that the ECB may have discussed with primary dealers earlier this week the possibility of buying Eurozone Sov linkers as part of SMP. Bunds at 138.19 (+41), Bobls at 124.91 (+23), Schatz at 110.37 (+2(, EStoxx 2448 +28, Eur 1.3156 +108
- ITC Greece: Andreas Koutras- There seems to be a lot of confusion regarding to how the ECB accounts for its Securities Markets Program (SMP) holdings. The reason it matters is because if the ECB is to participate in the PSI restructuring it would have to take a loss. And depending on how big the loss is, it would need to either ask its shareholders for a capital increase or absorb the losses. SMP is recorder in the ECB balance sheet under item 7.1. Currently it stands at 282billion. Market wisdom has it that around 45-55billion are Greek bonds that were bought during the futile attempts in 2010 to stabilise the market. One could guess-estimate that the average price the ECB paid for these Greek bonds is in the range of 75-85%. It is also widely believed that most of the purchases were near maturities, namely mostly up to 2013-14, but this is not confirmed. We also do not know if any of the proceeds of the already matured bonds were reinvested into other Greek bonds or not.
(Please read PDF attached for the full piece).
- ITC: Month-End Index Extensions, PGB impact, Equities and Bonds. Quick Note on Portugal and the impact on the indices: As we approach the end of the month, the size of the index extension comes into focus. The recent downgrade of Portugal below investment grade adds another twist to the equation. For portfolio managers still holding Portugese debt after all of this turmoil, a drop below investment grade forces them to sell their holdings no matter what the price on the security. This has been one of the reasons Portuguese debt has widened some 300bp (in 5 year) relative to Germany even as other peripherals such as Spain, Italy have benefitted from the introduction of the 3yr LTRO. Although portfolio managers would normally should have unloaded their Portuguese debt already at this time, will be interesting to see if any of them waited until the last minute to sell their positions.
Other thing of Note: with the S&P rallying +5.67% on the month, while USTs have only rallied some +0.52% (5yr + carry), there could also be some re-allocation away from stocks into Fixed Income at the end of the month (next Tuesday), increasing the market impact of the extensions
Barcap Month-End Index Extensions:
- US Aggregate +0.05 years,
- US Trsy +0.01,
- US MBS +0.07,
- US Agcy +0.10.
- EGB Aggr +0.12 years,
- Eur Aggr Trsy +0.13,
- Sterling +0.07,
- Sterling Aggr +0.03