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Daily Archives: 7th June 2018

7th June 2018

Week just passes us by

MARKET CLOSE:
iTraxx Main

72.9bp, +3.2bp

iTraxx X-Over

306.1bp, +6bp

🇩🇪 10 Yr Bund

0.49%, +3bp

iBoxx Corp IG

B+127bp, unchanged

iBoxx Corp HY

B+374bp, -1.5bp

🇺🇸 10 Yr US T-Bond

2.91%, -6bp

🇬🇧 FTSE 100

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🇩🇪 DAX

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🇺🇸 S&P 500

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Rate markets setting the agenda now…

The ‘relentless’ rise in Bund yields shows little sign of abating. Well, it feels relentless given that the 10-year yield has jumped by over 20bp in the last week! Even the poor German factory orders for April, where a drop of 2.5% was recorded versus March – and the fourth decline in orders in a row, failed to halt the sell-off in rate markets. Clearly, the market has interpreted comments from ECB board members on Wednesday that the QE bond purchase programme will come to an end by the end of the year. And the market is fretting.

It’s coming just when the growth dynamic across the Eurozone has hit a sustained poorer period with much uncertainty still into a potential summer of discontent on the trade tariff front. Inflation is barely showing signs of a relentless rise and is still well-below official targets. The Italians are an unknown, too, at this moment as the EU/Eurozone is grappling with an existential crisis with recalcitrant countries on several fronts.

It’s clear that the ECB needs to ween the financial system off the support it has much needed and enjoyed over the past decade, but the timing looks a little precarious for expecting an ending to the QE programme while the aforementioned event risk situations could tip the balance towards another crushing downturn and/or financial system panic. Now is the time for extreme vigilance and caution, because the worst could happen.

So, QE or not, we still do not expect the 10-year benchmark Bund yield to hit 1% this year and suspect it finds a level somewhere between 0.4 – 0.7% depending on the prevailing news flow. It was less than a fortnight ago that it was as low as 0.19% intraday as panic set in following the breakdown in talks of a new Italian government. The 5-year Bund yield was as low as -0.40% but is now at -0.12% having been in positive territory during the first quarter on expectations that the Eurozone economy was in rude health. It isn’t.

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