ITC Fixed Income Morning Meeting: Bunds to open around 138.85, Bobls at 125.32, Schatz at 110.405, Gilts at 116.05 (REF 131.12 TY)
- UST NY Recap: The US curve bull steepened on Thursday, with 5y, 10y, and 30y yields declining by 6bp, 8bp, and 6bp, respectively. Risk aversion declined, largely on reports (eg, Bloomberg) of progress on PSI negotiations in Greece, ahead of the start of the Governing Council meeting of the ECB. With the exception of Portugal, CDS spreads on peripheral sovereigns and senior financials tightened, 2y Libor-OIS narrowed and Italian 10y yields declined 18bp.
- US 7yr Auction Review: The Treasury auctioned $29bn in 7s, which tailed by 1.5bp on weak demand. At 2.73, the b/c ratio was lower than the previous 3m average of 2.82. Both indirect (12% versus 3m average of 15%) and direct bidder (32% versus 3m average of 39%)
- US Fed Ops: Today, the Fed is scheduled to sell $8-8.75bn in the Mar14-Jan15 sector. The largest holdings in the SOMA portfolio in this sector are 1.25% Mar14, 1.25% Apr14, and 1.875% Apr14s.
- USTs in Tokyo: some better selling (small) from the start today, but USTs are underpinned by weak Equity markets. There’s been some REC in USD swaps today. US 142.22 (-5), TY 131.11+ (-2 1/2), FV 123.25+ (-1 1/2), TU 110.12 1/4 (-1/4), SP 1311.90 -3.40, Eur 1.3105 -44
- European Fixed Income: Bunds to open around . Quiet day in terms of supply with no bond supply scheduled. At 10:00GMT, Italy will sell EUR8bn 3 month Bills and EUR3bn 11 month Bills. At 11:10GMT, the UK will sell 1, 3 and 6 month bills for a combined GBP3.5bn. At 16:15GMT, Bund, Bobl and Schatz Feb ’12 options expire. Feb Bund 138.50C is a large strike with market makers long 25k from a call seller. Market Makers are also long 140C but it doesn’t appear to be an issue for them. There are no issues with Bobl or Schatz expiries.
- Economic Data: Eurozone Money Supply for December is due at 09:00GMT, consensus is for growth of 2.3% (3m avg). In November, M3 growth slowed to 2.0% (vs. 2.6% in October). Some desks suggest there is some downside risk to this figure.
- Key Events/Speakers:At 11:00GMT, the ECB’s Gonzalez-Paramo (Middle) will be speaking in Madrid followed by ECB’s Draghi (Middle) at 13:15GMT, who will be speaking in Davos on “Europe’s Economic Outlook: What steps are needed to restore growth and confidence across the Eurozone?”
- ITC: Month-End Index Extns, 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 Portugese 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 Portugese 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
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