govt debt report 12 feb 2018
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Monday 12 February 2018


Sovereign bonds last week stabilised days after markets were spooked by a forecast-beating US jobs report fuelled by accelerating wages that raised fears of heightened inflation in the world’s biggest economy.


Despite efforts by the Federal Reserve to ease off QE with a QT programme and five rate hikes this cycle since December 2015, markets fear it may not be soon enough to cap rising general prices. Payrolls data was also enough to give the Dow Jones Industrial Average its sixth-worst point drop in history last week, although equities all marched 1.5pct higher on the final day of the week.


Further yield upside is likely to come this week when US President Donald Trump unveils the proposed 2019 Budget. At the end of last week, Congress approved a spending bill that boosts the public budget by USD300 Bln a year and with it the need for more borrowing – at the same time the Fed is buying fewer Treasury and agency bonds.


US Treasury yields have been steadily rising since November and that continued a week ago after stronger-than-expected non-farm payrolls as well as a slightly hawkish FOMC statement. While the Federal Open Makret Committee (FOMC), the Fed's policy makers, left US rates unchanged, they were bullish on both growth and inflation. But in the past week, the 10-year T-Note yield was surprisingly little changed. At the close on Friday, it yielded 2.83pct versus a four-year peak of 2.85pct at the close on 2 February in the wake of the NFP data.


The same pattern emerged for the interest rate-sensitive two-year T-Note since November, and it too stabilised in the past week, ending Friday at 2.06pct versus a loftier 2.15pct on 2 February.


The ultra-long T-Bond yield, however, continued to rise, to 3.139pct from 3.095pct on 2 February.


Looking at major economy bonds versus the 10-year T-Note, the 10-year UK gilt yield dipped to 1.578pct on Friday but with the T-Note yield also falling it led to a narrowing of the US spread over UK to 125 basis points from 127bps.


Against inflation-devoid 10-year JGBs, the US T-Note spread over Japan’s debt was 276pct – unchanged from a week earlier.


It was a similar story for the T-Note against the Bund, OAT and BTP, although in the case of the Italian debt the spread narrowed by 2bps to 79bps.


“A return to the low levels of volatility that has been in place in nearly all asset classes is unlikely, given that the return to a more normal level of long-term rate premia (as signalled by govt yield curves) looks to have a permanence to it, and thus requires many investors to revisit their asset allocation strategies,” said Marc Ostwald, strategist at ADM Investor Services.





Belgium (DBRS)

Greece (Fitch)

Ireland (DBRS)


A busy week in the Eurozone, while the UK sells 2057 Index-Linked Gilts and the US 30-yr TIPS, while Japan has 5-yr JGBs. Last week's turmoil saw the flow of corporate issuance slow to a trickle, and that may persist without some calm reasserting itself in equities and govt bonds.



Canada      - CAD 3.7 Bln 1.75% 2023 BoC

France       - EUR 7.0-8.0 Bln total 0% 2021, 0% 2023 & 6% 2025 OATs

France       - EUR 1.5-2.0 Bln total 0.1% 2025, 1.85% 2027 & 0.1% 2047 OATei

Germany     - EUR 1.5 Bln 2.5% 2044 Bund

Italy             - EUR 7.75 Bln total 0.2% 2020, 1.45% 2024 & 3.45% 2048 BTPs

Japan          - JPY 2.0 Trln 2023 JGB

Spain          - EUR 4.0-5,.0 Bln (estimate) 2022, 2028 & 2033 Bonos

UK              - GBP 2.25 Bln 1.75% 2057 Gilt

USA            - USD 7.0 Bln 2048 TIPS



George Matlock – LiveSquawk News


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