In the euro area, the new 10y benchmark
\nBund is trading about 0.32%. Spreads in
\nsovereign bond markets changed little last
\nweek. The downgrade in Italy\u2019s rating by
\nDBRS caused modest BTP underperformance.
\nPortugal spreads has decreased (357bps)
\nfollowing a successful 10y bond syndication.
\nSpreads on Spain\u2019s Bonos have declined to
\nthe 110bp area.<\/p>\n
Euro IG credit markets offer average spreads
\nof 122bps, unchanged from a week ago. High
\nyield premia are about 356bps after a 23bp
\nrally year-to-date. Emerging debt markets
\ncontinue to be underpinned by the search for
\nyield. Spreads (325bps) are close to last
\nyear\u2019s tights. Brazil\u2019s Central Bank lowered its
\nSelic rate by fully 75bps to 13%. The Brazilian
\nreal appreciated initially before drifting back
\nabove the 3.20 threshold against the US
\ndollar.<\/p>\n
Lastly, sterling plunged to $1.20. Theresa May
\nis pressed to unveil her hand and define
\npriorities in the negotiations with EU after
\nArticle 50 is triggered in March. The Japanese
\nyen keeps rising with a 1.8% gain last week
\nvs. the greenback. <\/p>\n
Robust US consumption<\/strong><\/p>\n Growth in the US was likely about 2.5%qoqa in Investment in capital equipment appears to be Against this background, Fed monetary policy In the euro area, The ECB will meet this Lean towards higher Bund yields<\/strong><\/p>\n The ECB\u2019s letter authorizing PSPP purchases US Treasury bond auctions (10y, 30y) DBRS downgrades Italy<\/strong><\/p>\n The rating agency cut Italy\u2019s sovereign credit In our opinion, Spanish Bonos offer more value Stability in credit spreads<\/strong><\/p>\n Euro IG spreads are stable about 122bps vs Emerging markets have proved resilient since T-note yields have had a somewhat volatile
\nthe three months to December 2016. Personal
\nconsumption remains the main growth driver.
\nConsumer credit increased $24bn in November,
\nthe largest gain since August. Retail sales rose
\n6.6%qoqa in the fourth quarter. AS a
\nconsequence, the trade deficit widened again
\nand may subtract up to 1pp off 4Q16 GDP.<\/p>\n
\nimproving. Rebound in structure spending is
\nunderway signaling a brighter picture for
\noverall investment.
\nInflation (headline CPI) will stand above 2% in
\nDecember for the first time since July 2014.
\nThe negative contribution from imported good
\nprices has reversed course on the back of
\nhigher energy prices. The Fed\u2019s narrative of the
\ninflation backdrop will likely evolve in the
\ncoming months for fundamental reasons
\ninstead of oil price gyrations. Unit labor costs
\nrose at a 3.6%yoy clip in 3Q16 in US
\nmanufacturing. Since 1988, labor compensation
\nclosely tracked growth in hourly productivity.
\nAnnual changes in unit labor costs averaged
\njust 0.15% over this period. In the US economy
\nas a whole, unit labor costs are up some 3%
\nfrom a year ago. The uptrend in production
\ncosts represents the real risk to price stability
\nin the medium run. Furthermore, fiscal policy is
\nlikely to be eased substantially under the next
\nAdministration. Public infrastructure investment
\nspending and promised tax cuts will support
\ndomestic demand growth. The corporate
\nincome tax reform includes protectionist
\nfeatures that have the potential to add to
\n(imported) inflation.<\/p>\n
\nwill become more restrictive in the coming
\nyear. The monetary cycle will depend closely on
\nthe magnitude of fiscal stimulus and risks to
\nprice stability. Janet Yellen will update Fed
\nFunds rate projections in keeping with the
\nabove-mentioned elements in March. The FOMC
\nforesees two to four rate hikes in 2017.
\nMarkets only price in one to two increases. <\/p>\n
\nweek. Mario Draghi will not change its
\ncommunication despite a sharp rise in
\ninflation in December to 1.1%yoy. Growth is
\nalso strengthening according to surveys. <\/p>\n
\nof securities yielding less than the deposit
\nrate has been signed by Mario Draghi. Such
\npurchases likely started last Friday 13
\nJanuary. In the wake of the press release,
\n30y Bund yields increased breaking above the
\n1% threshold. Demand for the new Jan27
\nbenchmark Bund had been strong at auction.
\nAbout 0.30%, 10y Bund yields seem in line
\nwith fair value, which we estimate at 0.29%.
\nModerate long duration positioning of final
\ninvestors seems no obstacle to a resumption
\nof the trend for higher euro yields in keeping
\nwith faster inflation. The ECB is, in fact, the
\nmain buyer in sovereign bond markets. On
\ntechnical grounds, the 0.31% level may be
\npivotal for market participants. If yields break
\nabove 0.37%, the next target may be 0.55%.
\nDownside references stand at 0.22% and
\n0.12%. We opt for a short stance in Bunds.
\nThe market environment may be conducive of
\nfurther steepening on a one\u2019s month horizon.
\nHowever, excess demand for Schatz\/Bobl is
\nslowly being unwound after the year-end
\nsqueeze. It is worth considering taking profits
\non swap spread tighteners and move back to
\nneutral in 2-year and 5-year maturities. We
\nalso recommend a tactical flattener on 2s10s
\nin the euro area.<\/p>\n
\nattracted great final investor demand last
\nweek. Indirect bidders made up 70% of total
\ndemand. Foreign central banks are again
\nadding to US bond holdings. T-notes issued
\nlast Wednesday drew bid below 2.25%. In 30-
\nyear maturity space, investors placed orders
\nat 2.75%. Fair value in 10y US yields stands
\nat 2.56% on our models. The unwinding of
\nshort positioning by speculative accounts may
\nhave maintained valuations below their fair
\nlevels since the start of the year. We hold on
\nto a short duration stance on US bonds. A
\nbreak above 2.47% would entail a signal of a
\ncontinuation of an uptrend in yields towards
\nprevious highs about 2.57-2.63%. <\/p>\n
\nrating one notch to BBBH. The downgrade has
\nno consequence in terms of PSPP-eligibility of
\nItalian debt securities. However, the lower
\nrating induces an increase in haircuts applied
\non bond collateral posted by banks at the ECB.
\nItalian banks depend on ECB repo funding to
\nthe tune of \u20ac205bn as at December 2016. For
\nexample, the haircut applied to a 10-year
\ncoupon bond issued by the Italian government
\nwill increase from 3% to 11.5% after the
\ndowngrade. The market reacted little to the
\nDBRS decision. Italian spreads remain close to
\n160bps. That being said, caution remains
\nwarranted as Moody\u2019s (Baa2, negative outlook)
\nis set to decide on Italy rating on February 10th.<\/p>\n
\nand stability albeit at a lower 110bp spread. We
\nhold on to our overexposure on Spain debt. The
\nspread on Portugal had suffered from
\nsyndication rumors early on this year. The
\ntransaction hit markets last week and was
\nindeed well received with 10-year Portugal
\nbonds pricing at 4.12%. The PGB spread curve
\nis nevertheless steep in part because of
\ndiminishing PSPP support. In core markets,
\nspreads offer little value versus Bunds except
\nfor 10-year French OATs and 30-year Belgian
\nOLOs. <\/p>\n
\nBunds with only small differences in trends
\nacross sectors. The asset class keeps attracting
\ninvestment flows as spread-for-rating levels are
\nbetter than on comparable sovereign bonds.
\nHigh yield is consolidating somewhat after a
\nstrong start of year. Spreads, underpinned by
\nstrong final demand, have come in to the tune
\nof 23bps year-to-date.<\/p>\n
\nthe beginning of the year. Spreads are holding
\nup at 325bps, in line with 2016 tightest levels.
\nMonetary easing (-75bps) was larger than
\nexpected in Brazil. The observed fall in inflation
\nrate provides Central Bankers with some room
\nfor manoeuver to support growth. Turkey is
\nunder pressure given existing external
\nimbalances and a challenging political backdrop
\nto say the least. The Turkish lira lost fully 22%
\nagainst the US dollar since November.<\/p>\n","protected":false},"excerpt":{"rendered":"
\nweek. The yield on 10y notes traded as low as
\n2.30% before closing last week at 2.40%.
\nShort positioning in US bonds has normalized
\nthanks in part to successful auctions.<\/p>\n","protected":false},"author":1,"featured_media":59964,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1483],"tags":[1809,1655,1657,1676,1699,1651,1807,2068,1678],"_links":{"self":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/59966"}],"collection":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/comments?post=59966"}],"version-history":[{"count":0,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/posts\/59966\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media\/59964"}],"wp:attachment":[{"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/media?parent=59966"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/categories?post=59966"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/beta.next-finance.net\/en\/wp-json\/wp\/v2\/tags?post=59966"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}