Bond Market Takes a Breather as Yields Rise
Interest-Rates / US Bonds Jun 01, 2010 - 02:28 AM GMTBy: Levente_Mady
The bond market took a breather last week after signs of exhaustion following a 12 point move during the past 2 months. US bonds remain in decent shape for the time being.
It is time to spend a little more time on the European scene. In last week’s note I pointed out the irony in the Germans calling for fiscal responsibility when they were in fact just the best of a bad bunch. My timing was rather fortunate as this past week we had a couple of real live examples of just how fickle the market can be. Among a number of other events in finance land, we had another slew of bond auctions not only in America but also in a few other places – Germany being one of the other governments peddling their bonds to the investing public. Obviously, the focus was on America as the US Treasury was scheduled to sell a total of $113 Billion 2-5-7 year notes. The auctions were considered mediocre as market participants entered close to 3 times as many orders as the amount of bonds that were sold (about $320 Billion worth).
On the other hand the German government was ONLY scheduled to sell 7 Billion Euro 5 year notes. They received bids for 6.1 billion Euros. That is a cover of 0.87 times versus a cover of 2.83 average for the US auctions. That is also called a failed auction in Germany. Now the conspiracy folks out there might tell us that those numbers are rigged and therefore no point in paying attention to them. I can understand suggesting that the US bids might be inflated especially since the Fed can just go out there and print money at will and purchase entire auctions if need be, but I am at a loss for an explanation of what (or whose) purpose it may serve to have a failed auction in Germany of all places… I am open to suggestions. The other event of interest last week was the downgrade of Spain by Fitch from AAA to AA+. Of interest here is not this one item but the implications from the series of sovereign downgrades that are likely to follow…
NOTEWORTHY: The economic calendar was mixed last week. On the survey front, the Conference Board Consumer Confidence Survey jumped over 5 points to a still weak 63, while the Michigan report was stable at an anemic 73. The housing market enjoyed further benefits of the temporary pick up activity due to the expiring tax credits. Existing Home Sales increased 8% to 5.77 million in April while New Home Sales rocketed up 19% to 504k during the same period. Look for some serious weakness in this space going forward! Meanwhile, mortgage applications for new purchases continue to fall to their lowest levels in decades – again heavily influenced by the housing tax credit expiry. Durable Goods Orders increased a healthy 3% in April; however the ex-transport component actually declined 1%.
The second cut at the Q1 GDP was disappointing as the experts were looking for an upward revision to the 3.2% initial figure, but got a downgrade to 3.0% instead. Weekly Initial Jobless Claims decreased from 474k to 460k last week and appear to be settling into a trading range at a less than attractive level for now. Personal Income rose in line with the forecast of 0.4%, while Personal Spending was flat. The good news is that for the first time in several months consumers did not increase spending by more than the increase in their income. The bad news is that the flat spending suggests further weakness for the economy in Q2. In Canada, the Current Account Deficit declined from $10.2 Billion to $7.8 Billion in the first quarter of 2010. This is still a far cry from the consistent surpluses Canada ran up to 2008. It is also another data point the Bank of Canada needs to consider as it plans to raise rates this coming Tuesday. This week’s economic schedule will be highlighted by the ISM Surveys as well as the closely watched monthly Employment report.
INFLUENCES: Trader sentiment surveys we follow keep slowly ticking in the bullish direction. On a scale of 0-10, the surveys are slightly over 6.0, which is moving in the right direction for the bulls but it is not overbought enough to help the bears yet. The Commitment of Traders report showed that Commercial traders were net long 382k 10 year Treasury Note futures equivalents – which is down a small 12k on the week. This metric is supportive. Seasonal influences are turning positive this week. The technical picture is positive as the bond futures continue to hold up well. It looks like a new 120 to 125 trading range might be developing heading into the summer.
RATES: The US Long Bond future was down 2 points to 123-03, while the yield on the US 10-year note increased 8 basis points to 3.30% last week. The Canadian 10 year yield decreased 5 basis points to 3.31%. The Canada-US 10 year spread moved in the Canadian market’s favour. The US 10 year yield is trading 1 bp lower than the Canadian 10 Year yield as the Treasury yield underperformed by 13 basis points relative to its Canadian counterpart. The US yield curve was 7 basis points steeper with the difference between the 2 year and 10 year Treasury yield now at 253. The yield curve was ultra steep when 2s-10s were trading near 300. Now it is only very, very steep.
BOTTOM LINE: Bond yields were higher across the board last week, while the yield curve tilted steeper. The fundamental backdrop remains supportive. Trader sentiment is moving in the positive direction; support provided by the Commitment of Traders data is positive while seasonal influences are turning positive. Based on this and the positive technical set up, we will be looking to buy into weakness during the first part of June. Shade to the long side and earn the carry!
By Levente Mady
lmady@mfglobal.com
www.mfglobal.ca
The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable. Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors. Please carefully consider your financial condition prior to making any investments.
MF Global Canada Co. is a member of the Canadian Investor Protection Fund.
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