The EU Summit Effects on the Bond Market

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The results of the EU Summit have brought forward the return to the bill market, as Ireland obtained some promises regarding the re-financing of its bank bail-out costs via the ESM, after Spain obtained a direct recapitalization of its banking sector.

Of course, it is of yet not clear under which modalities Ireland would be able to tap the ESM. It is unlikely it will be able to refinance the whole of that cost. However, it suggests that the Irish debt and the cost of debt will be lower, which is a big positive for the country, that makes its bonds again more attractive for private investors. 

The Irish National Treasury Management Agency announced an auction of Irish Treasury Bills for tomorrow. It will auction a single line (15 October 2012 for an amount of €500M). The Irish government shut the primary issuance market after having received a bail-out in November 2010. So, this return is an important sign, even if it is in the Bill and not the bond market. The bail-out program foresees a return to the bond auction in 2013.

The Dutch debt Agency (DSTA) launched its new 5-year government bond (15 January 2018). Investors massively showed up with €13.8B bids and got about €6B of bonds. It was sold at 60 bps above 4% DBR 2018 or an issuance price of 99.71 and a yield of 1.305%. The DSTA aims to top up the amount outstanding to a minimum of €15B via reopening later this year. 

The EU Summit at the end of last week and expectations for monetary easing at the ECB and BoE meetings tomorrow are better explanations why equities do well without really hitting safe haven bonds. The profit taking left the US curve bear steepened at the end of the shortened session with yields up between 0.8 and 4.7 bps. 

In the German market, the Bund was very much sideways oriented in an intraday 30 ticks range, also in quite low volume trading. In a daily perspective, the curve steepened. Yields fell about 1 bps in the 2-to-5-year sector, were up 1.4 bps at the 10-year bucket, but once again the 30-year lagged (see graph below) and saw its yield rise by 6 bps. The latter might still be the result of the change in the discount factor pension funds are obliged to use when discounting their liabilities. The changes diminish their need to buy very long paper. The news flow was only moderately important for the intra-day price action. The ECB said banks could in exceptional circumstances use own-government guaranteed bank bonds in its lending operations. The Dutch parliament approved the ESM bills, while in Germany, the CSU coalition partner of chancellor Merkel threatened to leave the coalition if Merkel would make more concessions in the handling of the euro debt crisis. 

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About: FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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