Weekly Treasury Update
US Dollar
Prices for US Treasuries fell on Friday after data showed consumers grew more optimistic in May and an index of leading indicators pointed to economic growth ahead. US consumer sentiment rebounded in early May to the highest level in nearly six years as Americans felt better about their financial and economic prospects, particularly among upper-income households, a survey released on Friday showed.
With the better-than-expected retail sales figures on Monday, “you could probably say maybe the consumer is in a little better shape than we were thinking,” said Steve Van Order, fixed-income strategist at Calvert Investments in Bethesda, Maryland. But he cautioned that Treasuries are likely to stay within recent ranges as the dialogue continues about when the US Federal Reserve might slow its asset-purchase programme. That debate includes a third, less-often-heard, possibility: that the Fed could increase its purchases if needed.
The statement from the Fed’s April 30-May 1 policy meeting said the Fed’s policy committee continued to see “downside risks” to the economic outlook and said it was “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labour market or inflation changes.”
Van Order pointed to next Wednesday’s release of minutes from the Fed’s most recent policymaking meeting as perhaps giving investors a hint at central bankers’ thinking. Benchmark 10-year Treasuries dropped 21/32 in price while their yields rose to 1.957% from 1.879% late Thursday.
The 30-year bond traded 1-11/32 lower. Its yield rose to 3.17% from 3.096% late Thursday. Treasuries rallied in the previous two sessions as a spate of disappointing economic data about jobs and inflation underscored potential weakness in the world’s largest economy. The data argued against the Fed slowing or stopping its buying of $85bn per month in Treasuries and mortgage-backed securities, a bid to prop up the US economy and reduce unemployment.
Euro
Spanish and Italian government bond yields dropped on Friday and were seen falling further as supply pressure eased after large debt sales earlier this week. The prospect of central bank policies remaining ultra-easy for months, despite debate over whether the Federal Reserve might slow its bond buying, has propped up demand for higher-yielding assets in recent months.
In the past week, however, markets had to absorb €7bn worth of Spanish 10-year debt and 6bn euros of Italian 30-year bonds and that has pushed yields higher in the two countries. With the unscheduled supply pressure out of the way, the rally in peripheral debt is expected to continue at least until Federal Reserve Chairman Ben Bernanke’s testimony before the congressional Joint Economic Committee on Wednesday.
Spanish 10-year yields were 9 basis points lower at 4.22%, while equivalent Italian yields were 8 bps down at 3.90%. Earlier in May, they hit 2-1/2 year lows of 3.95 and 3.68%, respectively. Spain will sell bonds maturing in 2016, 2018 and 2026 next week, with Barclays expecting issuance to total €4bn. The auctions are part of the regular schedule and are not expected to cause significant selling pressure in secondary markets.
German Bunds briefly hit one-week highs on Friday, with traders citing talk the European Central Bank was checking with some banks whether they were ready for a potential cut in its deposit rate to below zero. German Bund futures were last 13 ticks higher on the day at 145.44, having risen as high as 145.74 earlier in the session. Two-year German yields the most sensitive to shifts in interest rate expectations — were back below 0% at minus 3 basis points.
The ECB had no immediate comment. Speculation it could take its overnight deposit rate into negative territory — effectively charging banks for parking cash with it overnight — has persisted since ECB President Mario Draghi said last month the bank was prepared for such a move.
Greek bonds were among the market’s standout performers with 10-year yields down 38 bps at 8.29% as investors priced out the risk of another default after Fitch Ratings raised Greece’s credit rating on Tuesday.
Range for previous week: $1.2795-$1.3028.
Range for this week: $1.2735-$1.309.
Sterling
British government bonds ended the Friday session modestly lower, with sliding Treasury prices and firmer Bunds pulling gilts in different directions. Weakened by Thursday’s sizeable supply of 30-year paper, gilts also widened their underperformance versus German debt.
Ten-year yields rose 2 basis points to 1.879%, with the spread over Bunds almost 3 basis points wider at more than 56 basis points. “We are sitting in between Europe and the States,” said Eric Wand, fixed-income strategist at Lloyds. “There’s a bit of indigestion stroke profit-taking after the auction yesterday,” he added.
June gilt futures settled 15 ticks lower at 117.92. German Bunds were 14 ticks up, underpinned by talk in markets that the European Central Bank was checking the readiness of some banks to handle negative deposit rates.
Meanwhile, Tresuries fell after data showed a rebound in US consumer sentiment to the highest level in nearly six years.
US debt prices had already drifted lower after rallying in the previous two sessions, as investors weighed whether the Federal Reserve is preparing to taper its asset purchases, even as weak economic data blurred the outlook.
Earlier on Friday, Bank of England rate-setter Martin Weale said the central bank might have more scope to boost the economy after Carney took over because of tentative signs of lower inflation ahead.
The domestic calendar picks up pace next week, starting with data on consumer and producer price inflation on Tuesday. Both are expected to have eased in April.
Developments in the US will also be important, with a testimony by Fed chairman Ben Bernanke to Congress on Wednesday taking centre stage.
Range for previous week: $1.5156-$1.5384.
Range for this week: $1.5095-$1.5444.
Yen
Japanese government bond prices rose on Friday for a second day after a four-session plunge, bolstered by the Bank of Japan’s asset-buying operations and reassured by the previous session’s solid five-year sale.
The BoJ offered to buy outright ¥600bn ($5.88bn) in JGBs with residual maturities of more than 5 years and up to 10 years, and another ¥700bn with residual maturities of more than 1 year and up to 5 years.
Still, many strategists believe that with the central bank buying an amount equivalent to 70% of new issuance, the market will be chronically choppy and yields will face upward pressure.
Japanese Finance Minister Taro Aso told parliament on Friday that it is desirable for currency markets to be stable, and that the Bank of Japan was taking various steps in response to the rise in long-term rates.
The yield on the 10-year cash bonds fell 4.5 basis points to 0.795%. On Wednesday, it rose as high as 0.92%, its highest level in over a year. The 10-year JGB futures contract ended up 0.42 point at 142.69 after rising as high as 142.85 in the morning session.
The five-year bond was higher after solid demand at a sale of that maturity on Thursday; its yield falling 2 basis points to at 0.37% after it fell as low as 0.355% early in the session. Five-year yields hit a two-year high of 0.455% on Wednesday.
“Yesterday’s five-year auction was reassuring, but the supply/demand situation is still very unclear,” said a fixed-income fund manager at a Japanese asset management firm in Tokyo.
Data released early on Friday that showed Japanese core machinery orders jumped a bigger-than-expected 14.2% in March, the quickest monthly pace in eight years. While the JGB market had no immediate reaction to the data, mounting evidence of improvement in the Japanese economy will erode demand for the safety of fixed-income assets.
The BoJ will hold a regular policy meeting on Tuesday and Wednesday next week, at which it is likely to stand pat.
It might front-load bond purchases or offer funds via market operations more frequently if the bond market turbulence persists, which are technical steps that can be taken by its bureaucrats without approval by the nine-member board.
Range for previous week: ¥101.24-¥103.30.
Range for this week: ¥100.50-¥104.