BONDS: EGBs-GILTS CASH CLOSE: War De-Escalation Triggers Sizeable Rally
Apr-17 17:12
EGBs and Gilts soared Friday as the US and Iran appeared on the verge of reaching a lasting end to hostilities, capping a week of strong gains.
- A slew of headlines pointing to further US-Iran de-escalation saw a sizeable bull steepening rally in early afternoon, punctuated by Iran announcing it would allow ships passage through the Strait of Hormuz and Pres Trump corroborating.
- Though each side's details of the conditions for Strait re-opening within the current ceasefire appeared to differ, risk assets were buoyant and energy prices fell sharply (Brent -11%, TTF gas -7%), with Pres Trump eyeing an deal to end the war within a "day or two".
- Gilts slightly underperformed peers at the short end. BoE chief economist Pill's comments Friday sounded like justification for a vote for a hike in April and MNI now considers him to be the most hawkish member on the MPC.
- Both the German and UK curves bull steepened on the day. Unsurprisingly, periphery/semi-core EGB spreads to Bunds tightened, with Italy and Greece outperforming.
- For the week, both the UK and German curves bull steepened: Germany 2Y -19bp, 10Y -10bp; UK 2Y -14bp, 10Y -7bp.
- Moody's will review Belgium's sovereign rating after hours (Current rating Aa3, Outlook Negative). Next week brings April flash PMIs and UK labour market and inflation reports.
Closing Yields / 10-Yr EGB Spreads To Germany
- Germany: The 2-Yr yield is down 10.9bps at 2.408%, 5-Yr is down 8.6bps at 2.611%, 10-Yr is down 7.2bps at 2.96%, and 30-Yr is down 5bps at 3.541%.
- UK: The 2-Yr yield is down 9.8bps at 4.122%, 5-Yr is down 9.6bps at 4.248%, 10-Yr is down 8.5bps at 4.762%, and 30-Yr is down 7.4bps at 5.493%.
- Italian BTP spread down 5.5bps at 71.8bps / Spanish down 2.1bps at 42.9bps
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FED: Statement: 1, 2, or 3 Dissenters? (2/2)
Mar-18 16:54
- A change to the forward rate guidance would of course be impactful, but given prevailing uncertainty and Committee discord over the path forward, we doubt there is sufficient decisiveness to make an amendment here.
- The Statement added “extent and timing” in December to signal that after 3 consecutive cuts, the easing bias remains but the pace has slowed and the next move will be data-dependent. That’s still enough to convey the Committee’s optionality and non-commitment on future rates.
- There’s no doubt that the undercurrent for guidance is in a hawkish direction, with the January meeting minutes noting “Several participants indicated that they would have supported a two-sided description of the Committee's future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels.”
- MNI’s Instant Answers questions for the meeting include a tally of dissenters. Gov Miran looks likely to dissent (again) in favor of a 25bp reduction, and he may again be joined by Gov Waller who said in February that his decision on the meeting would be a “coin flip” that would be decided by the incoming February payrolls and CPI data. A third dissent – by Gov Bowman – is unlikely (she didn’t dissent in January) but not unthinkable.
- Indeed many analysts expect 3 dissents.
- The Implementation Note could at some point include a tweak of administered rates, including a nudge lower in the interest rate paid on reserve balances from the current 3.65%, or the standing repo facility rate of 3.75%. We continue to include these in our Instant Answers, just in case – once again we don’t expect any move at this meeting.
- Additionally the Fed is due to update soon on its reserve management purchase tempo. It has said it will dial back purchases from the existing $40B/month once the mid-April tax season (which drains reserves / liquidity) is at an end. The current NY Fed bill buying schedule runs through April 7, with the new one due to be published April 13, so we wonder if there will be a signal provided ahead of time as to the exact size of future monthly RMPs.
OPTIONS: Mixed Trade On Eve Of BOE/ECB Decisions
Mar-18 16:52
Wednesday's Europe rates/bond options flow included:
- RXJ6 126.50/126.00ps 1x2, bought for -1 (receive) in ~4k
- ERM6 97.75/97.8125/97.9375c ladder, bought for 2 in 6k
- SFIZ6 96.50/96.80/97.10c fly, bought for 5 in 5k
- 0NM6 96.30/96.60cs, bought for 9.5 in 10k
US 10YR FUTURE TECHS: (M6) Monitoring Resistance
Mar-18 16:51
- RES 4: 113-07+ High Mar 3
- RES 3: 113-03 High Mar 4
- RES 2: 112-10/112-24+ 20-day EMA / High Mar 10
- RES 1: 112-07 High Mar 18
- PRICE: 111-25 @ 16:49 GMT Mar 18
- SUP 1: 111-11 Low Mar 13 and the bear trigger
- SUP 2: 111-08+ Low Feb 3
- SUP 3: 111-06+ Low Jan 20 and a key support
- SUP 4: 111-00 Round number support
A bear cycle in Treasuries remains intact and this week’s recovery appears corrective - for now. Initial firm resistance to watch is 112-10, the 20-day EMA. A clear breach of it would signal scope for a stronger bounce. For bears, a resumption of the downtrend would open the next key support at 111-06+, the Jan 20 low. Clearance of this level would highlight an important medium-term bearish development.
