(Bloomberg) – On Wednesday, the prices of government bonds, led by German papers, largely made gains. A combination of growing concerns about the economic impact of expanded measures to contain the virus infection, mixed quarterly reports and further dwindling hopes for a US fiscal package drove bond yields down. In addition, investors seem to continue to rely on the European Central Bank to ease monetary policy.
Italian government bonds did not quite keep up with the performance of the core countries and their peers. After their yields reached new all-time lows again at the long end of the yield curve, they gave up all their price gains in this area until the close of trading. Profit-taking appears to have taken place, which is no surprise given the performance of the past few days.
The yields on Portuguese government bonds fell after the successful completion of the two bond increases and outperformed their Spanish counterparts. The prices of Irish bonds, however, limited a large part of their price gains until the close of trading. The fact that the British government does not want to break off talks on a trade agreement with the European Union immediately after the ultimatum expires on October 15, according to informed circles, only helped the courses for a short time. However, the spread of Irish to German bonds is almost at the same level as it was before the pandemic broke out.
Ultimately, the further negotiations on the trade agreement with Great Britain will depend on the results of the European Council meeting on October 15-16. The Agenda is fully packed. The heads of state and government will also deal with the EU budget and thus the reconstruction fund, for whose implementation a number of hurdles – in particular the link between the rule of law and payments – have to be overcome.
Given the guidelines from Asian trading with somewhat declining US and European equity futures as well as slightly falling Treasury yields, government bonds from the core countries should start the day predominantly well. For the financial markets it will be a matter of assessing the additional restrictions on public life in Portugal, among others, but above all in the two largest economies in the euro area, Germany and France.
The day with Bloomberg: Dax future falls, German corona record
Since the number of daily viral infections is either persisting at a high level or is increasing, the most recently announced restrictions may not be the end of it. As the hospitals become increasingly busy, additional measures are likely, although politicians want to prevent a second lockdown for economic and fiscal reasons.
Nevertheless, there is an increasing probability that economic development will suffer again or that the upturn will at least slow down. That should then actually call the European central bank to the scene. In any case, the movement in yields, including Bunds, indicates that investors are firmly expecting monetary policy to be relaxed further, as a return on 10-year Bunds well below the deposit rate mark can otherwise hardly be justified in the longer term.
The European central bankers have repeatedly emphasized their willingness to act in recent weeks, and Yves Mersch explained that interest rate control is also part of the ECB’s toolbox. During her appearance in the evening, the ECB President will probably also point out the importance of fiscal support for monetary policy.
Despite the fatigue that the BTP rally showed on Wednesday, demand for bonds from the periphery is likely to continue. In addition, the yield curves should continue their bull flattening.
Economic data from countries in the euro area – including final consumer price data from France, industrial orders from Italy – will not affect the yields of bonds in the euro area. The same applies to US import and export prices from September, which will be published in the afternoon.
On the data side, the main focus should be on the weekly labor market data and the two regional Fed indicators – Empire Manufacturing and Phili Fed.
The weekly labor market data are said to have improved slightly. The level of initial job applications and registered unemployed remains high. However, the data may be skewed as it is used for California get frozen due to technical problems. This will make it difficult to interpret because of the importance of California to the entire United States. The expected slight progress in job creation is likely to support Treasury rates nonetheless. The same applies to the forecast slight declines in both regional Fed indicators.
With Raphael Bostic, Thomas Barkin, James Bullard, Randal Quarles, Robert Kaplan and Neel Kashkari (the last three are entitled to vote), numerous US Federal Reserve representatives will once again speak out. If you deal with the economic outlook, you should point out the fragile upswing with the slow decline in unemployment and the numerous risks for the upswing. You will once again ask for fiscal support. They will remain cautious about easing monetary policy, although pigeons like James Bullard or Neel Kashkari may well bring easing into play. The central bankers see the ball in politics.
However, the desire for fiscal support less than three weeks to go, as well as the divergent positions of Democrats and Republicans, remains unheard, although talks continue today. And even after the election, it will not only depend on who the future US president is, but also what the majority in Congress will be. Unless the Republicans retain their majority in the Senate, a trillion dollar stimulus package is unlikely. Many Republican senators are critical of an extensive stimulus package due to the expansion of US debt.
France and Spain will show themselves on the capital market with planned issues. Then there is Austria, which on Wednesday issued a mandate for the placement of a new 20-year bond.
The French Treasury is with three coupon bonds and two linkers approaching the investors. With maturities in May 2025, February 2026 and October 2027, the coupon bond increases, with which up to 7.5 billion euros are to be raised, are aimed at the middle section of the French yield curve. Additional up to 1 billion euros are to be added to the Linker which have terms until July 2030 and March 2036. The top-ups should be digested relatively easily.
Due to the reduction of the issue volume for the current year, the Spanish Tesoro will only offer one bond. It is a new issue with a term of January 31, 2026. The bond, which has a zero coupon, is expected to raise up to 3 billion euros for investors.
Presumably the Tesoro will place the entire volume. With a return of around -0.3%, however, the demand should be limited. In addition, Spanish government bonds have recently been in less demand than Italian and Greek bonds. The issue should benefit from the fact that the bond is a new bond. Nevertheless, the placement should require concessions in return.
After the announcement of the mandate for the placement of a new 20-year government bond, the long end of the Austrian yield curve reacted immediately with price losses. The curve was unable to recover from this until the close of trading, so that some of the concessions that the placement will require were already enforced on Wednesday. Accordingly, the underperformance of the long end of the yield curve against its peers should be limited until the bond is placed on Thursday.
In the evening, Treasury will be offering $ 65 billion in T-bills with terms of four and eight weeks. The placement should go smoothly.
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