Download Credit spreads tighten, yen-crosses rally on improved market

Thursday, 30 April, 2009
Credit spreads tighten, yen-crosses rally on improved market sentiment
ƒ
Credit spreads narrow marginally on improving
investor
confidence.
Credit
spreads
narrowed
marginally this week on increased market optimism that
the global recession is nearing it trough. US Q1 GDP
contracted by a higher than expected 6.1%qoq
annualized, but surprisingly robust consumer spending
and a record drop in inventories were widely seen as
pointing to a improved growth outlook in the coming
months. Separately, Japan’s industrial output rose in
March for the first time in six months, South Korea’s
output recorded the third monthly consecutive increase
while Eurozone economic sentiment improved in April for
the first time since May 2007. FOMC’s acknowledgement
in the April statement that “the pace of economic
contraction appears to be somewhat slower”, also helped
lift market sentiment. A bulk of US Q1 earnings results
which came in less-weak-than expected, added to
improved market sentiment.
ƒ
Long-dated maturities underperform on lingering
supply. Bond supply-related concerns- in view of the US
government’s need to fund massive bailout-out packagescontinue to keep long-dated US Treasury securities under
pressure. The bond market this week had to digest a new
$101bn flow of bond issuance in 2-yr, 5-yr and 7-yr
notes, just a part of the enormous pending $2 trillion
total worth of government debt issuance expected this
year.
ƒ
JPY-crosses bounce on increased risk appetite.
Following the conclusion of its two-day meeting on
Wednesday, the FOMC decided unanimously to hold the
Fed Funds target rate stable within 0.0-0.25%, as
expected. In the accompanying statement, the FOMC said
that the economic outlook has improved modestly since
the March meeting and, though the economy continued to
shrink, the pace of contraction appears to be somewhat
slower. Coming on the heels of a recent bulk of less direthan-expected US macro data and Q1 corporate earnings
results, the FOMC statement helped market participants
look though swine-flu related concerns that were
prevailing in the early part of this week. Improved market
sentiment saw JPY-crosses recovering from recent losses.
INDEX
Credit .............................................................. ................... 2
Foreign Exchange ........................ ............... 3
Bonds ..................................................... ............................4
GLOBAL RISK MONITOR
Credit spreads narrow marginally on improving investor confidence
Meanwhile, the cost of protecting many European bank bonds moved
slightly lower over the last few sessions on somewhat eased
concerns about the state of the global financial sector. Indicatively,
Deutsche Bank’s 5-yr CDS stood at around 146bps late this week,
some 5bps narrowed compared to levels seen early last week,
following a larger-than-expected Q1 net profit.
The Fed’s Treasury debt purchase plan and other US liquidityboosting measures helped the 3-month US Libor-Overnight Indexed
Swap spread remain in a downward trend for the sixth week in a
row. The corresponding spread narrowed to 83.25 on Wednesday,
the lowest level since September 9, 2008, just ahead of Lehman
Brothers’ collapse. The 3-month EUR Libor-EONIA closed at
65.02bp, not far from year-to-day lows of 56.2vps recorded a few
sessions ago with the 3-month EUR Libor plunging to fresh record
lows of 1.371%.
250
150
100
50
Jan-09
Apr-09
Oct-08
Oct-08
Apr-09
Jul-08
Jul-08
Jan-09
Apr-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
US 3M Libor - OIS (in bps)
400
300
200
100
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
0
Risk-Metrics
Credit
30-Apr-09 1Wk Net Chg high (y-t-d )
iTraxx Europe
145
iTraxx Crossover
823
Money (LIBOR - OIS in bps)
01-Jan-09
-9
209
177
-30
1150
1024
30-Apr-09
1Wk Ago
high (y-t-d )
01-Jan-09
USD
82
89
123
122
EUR
64
60
114
110
104
107
165
Swap spreads (gvnt bond yield - swap rate) in bps
162
GBP
30-Apr-09
1Wk Ago
high (y-t-d )
01-Jan-09
USD 10yr
-8
-14
-11
-35
USD 2yr
-56
-64
-52
-80
EUR 10yr
-26
-27
-11
-79
EUR 2yr
-46
-50
-48
-100
01-Jan-09
Equity markets
30-Apr-09
1Wk Chg
high (y-t-d )
VIX
35
-2
57
39
FX
30-Apr-09
1Wk Chg
high (y-t-d)
01-Jan-09
EUR/CHF
1.51
0.20
1.54
1.49
USD/CHF
1.14
0.92
1.19
1.06
1Wk Ago
high (y-t-d)
30-Apr-09
3-mth implied Vol.
14
13
23
(EUR/USD)
3-mth implied Vol.
14
14
21
(USD/JPY)
Emerging Markets 29-Apr-09 1Wk Net Chg high (y-t-d)
EMBI+ (spread in bp
537
-21
698
iTraxx Europe Index
(Investment grade credits )
200
iTraxx Crossover
(Junk - rated)
Apr-06
In the European credit derivates market, the iTraxx Crossover
index (composed of 45 mostly ‘junk’-rated bonds) eased to yearto-date lows of 815bps on Thursday, some 40bps narrower
compared to levels a week earlier. Similarly, the ITraxx Europe
index fell to 140bps on Thursday, the lowest level since midNovember, after revisiting levels near 155bps a few sessions ago.
Elsewhere, the US main investment-grade credit default swap
index CDX closed to a nearly three-month low of 205bps on
Wednesday compared to levels slightly above 220bps recorded last
week. Elsewhere, the VIX index dropped to a fresh year-to-date
low of 38.08 on Wednesday after rising temporarily to 40bps early
last week.
1400
1200
1000
800
600
400
200
0
Jan-06
Credit spreads narrowed marginally this week on increased market
optimism that the global recession is nearing it trough. US Q1 GDP
contracted by a higher than expected 6.1%qoq annualized, but
surprisingly robust consumer spending and a record drop in
inventories were widely seen as pointing to a improved growth
outlook in the coming months. Separately, Japan’s industrial
output rose in March for the first time in six months, South Korea’s
output recorded the third monthly consecutive increase while
Eurozone economic sentiment improved in April for the first time
since May 2007. FOMC’s acknowledgement in the April statement
that “the pace of economic contraction appears to be somewhat
slower”, also helped lift market sentiment. A bulk of US Q1
earnings results which came in less-weak-than expected, added to
improved market sentiment.
01-Jan-09
23
18
01-Jan-09
665
Selective 5-year Credit Default Swap Spreads
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
0
US & European fin 30-Apr-09
Citigroup (US$)
589
1Wk Ago
high (y-t-d ) low (y-t-d )
595
666
169
Merrill Lynch (US$)
453
398
562
114
Morgan Stanley (US$
373
367
446
312
Credit Suisse (EUR)
164
166
263
135
Deutsche Bank (EUR
UBS (EUR)
145
189
145
194
167
362
95
189
2
GOVERNMENT BONDS
Long-dated maturities underperform on lingering supply concerns
Bunds outperformed US Treasuries this week with the
corresponding 10-yr yield spread hovering around -7.5bps on
Thursday vs. levels close to -20bps a week earlier, following
the FOMC´s less negative-than-expected economic
assessment earlier this week. Expectations that the ECB might
follow suit in launching quantitative easing measures at the
May meeting, also had an impact. Bunds also outperformed UK
gilts with the corresponding spread widening to two-month
highs near 38.5bps from levels close to 29.5bps a week earlier
as market participants continue to digest the UK government’s
recent announcement of a record GBP 220bn of gilts issuance
in the 2009/10 fiscal year. Elsewhere, the 10yr GGB/Bund
yield spread widened close to 218bps on Thursday from levels
around 210bps a week earlier, with Finance Minister
Papathanassiou announcing that Greece will borrow a total of
EUR 50bn ($65 billion) this year, more than a previous target
of EUR 43.7bn..
7.5
10YR Government Bond Yields
6.5
5.5
2/10 yield spreads
220
US
GERMANY
120
20
350
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
-80
10YR yield spread vs Germany (in bps)
300
250
200
Italy
150
Greece
100
50
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
0
Jan-01
In Eurozone, the 2/10-year Bund yield curve undertook some
bullish steepening this week with the short-end outperforming
on expectations of some further ECB rate easing ahead.
Comments by ECB member Nowotny that euro zone rates will
stay low for some time, also favored taking the yield on the 2yr Swatch to one-month lows near 1.315bps at some point this
week vs. levels close to 1.46bps just a few sessions ago. The
corresponding spread was trading close to 185.0bps at the
time of writing vs. levels around 175bps a week earlier.
Meanwhile, supply concerns linger. Eurozone sovereign issuers
have issued some €250bn year-to-date in government paper
and markets expect full-year supply to reach €800bn in 2009.
This compares to €640bn last year and €550bn in 2007.
320
Jan-00
Bond supply-related concerns- in view of the US government’s
need to fund massive bailout-out packages- continue to keep
long-dated US Treasury securities under pressure. The bond
market this week had to digest a new $101bn flow of bond
issuance in 2-yr, 5-yr and 7-yr notes, just a part of the
enormous pending $2 trillion total worth of government debt
issuance expected this year. With long-dated Treasuries
underperforming on lingering worries over burgeoning supply,
the US 2/10-yr bond yield differential retained its steepening
bias this week, with the spread trading close to 218bps at the
time of writing on Thursday, its widest since late November,
vs. levels near 198bps a week earlier. The yield on the 10-yr
US benchmark hit five-month highs of 3.13% on Thursday
compared to levels near 2.90% early last week, giving back all
of its gains recorded in the aftermath of the March 18 FOMC,
where the US central bank announcement its plan to purchase
up to $300bn in longer-term Treasury securities. In fact, the
sharp increase in the 10-yr US Treasury yield raises questions
about the effectiveness of the Fed’s quantitative easing policy
at a time when supply concerns linger. The US Treasury
announced that it will auction a total of $71bn in 3-, 10- and
30-yr securities next week while the Fed will be active twice
purchasing US Treasuries with maturities from March 2011
though February 2019.
Government Bonds Yields & Swap Rates
Bund
2yr yield
5yr yield
10yr yield
30-Apr-09
1.35
2.36
3.18
1Wk Ago
1.45
2.44
3.22
1-Jan-09
1.76
2.32
2.95
Slope (2/10yr spread in bps)
2yr swap spread (bps)
5yr swap spread (bps)
182
-46
-34
178
-50
-37
120
-100
-93
10yr swap spread (bps)
-26
-27
-79
US Treasuries
2yr yield
5yr yield
10yr yield
Slope (2/10yr spread in bps)
2yr swap spread (bps)
5yr swap spread (bps)
0.93
2.03
3.12
219
-56
-53
0.92
1.88
2.92
200
-64
-59
0.76
1.55
2.21
145
-72
-56
10yr swap spread (bps)
-8
-14
-35
GGB (Greece)
2yr yield
5yr yield
10yr yield
Slope (2/10yr spread in bps)
2yr swap spread (bps)
5yr swap spread (bps)
2.52
4.53
5.33
281
70
184
2.66
4.65
5.33
267
71
184
4.16
4.96
5.23
107
140
171
10yr swap spread (bps)
189
184
149
Periphery spreads
10yr Italy vs. Germany
5yr Italy vs. Germany
10yr Greece vs. Germany
110
81
215
109
80
211
143
132
228
5yr Greece vs. Germany
217
221
264
30-Apr-09
Market
implied (endH1, 2009)
0.125
1.25
0.10
0.50
0.25
0.125
0.75
0.10
0.50
0.25
Central Bank Monitor
4.5
3.5
US
Germany
2.5
Sep-08
Jan-08
May-07
Sep-06
Jan-06
May-05
Sep-04
Jan-04
May-03
Sep-02
Jan-02
May-01
Sep-00
Jan-00
1.5
FED
ECB
BoJ
BoE
SNB
EFG
Eurobank
(end-H1,
2009)
0.125
1.00
0.10
0.50
0.25
3
CURRENCIES
JPY-crosses bounce on increased risk appetite
Spot as of
April.30,
2009 GMT
14:00
Direction
(1-week
view)
1.3225
98.41
130.11
0.7294
0.5659
1.1943
0.8981
10.6513
8.7180
1.5086
Ù
Ù
Ù
Ü
Ù
Ü
Ù
Ü
Ù
Ù
EUR/USD
USD/JPY
EUR/JPY
AUD/USD
NZD/USD
USD/CAD
EUR/GBP
EUR/SEK**
EUR/NOK**
EUR/CHF
Consens. Consens.
1-mth*
3-mth*
1.3180
98.0
129.4
0.68
N/A
1.250
0.923
10.62
9.00
1.520
1.3000
99.3
129.9
0.67
0.53
1.270
0.907
10.43
8.90
1.529
* Reuters March 2009 FX Poll
**Survey for SEK, NOK conducted in February 2009
1.7
1.6
1.5
1.4
1.3
EUR/USD Rate
Jan-09
Feb-09
Mar-09
Apr-09
Feb-09
Mar-09
Apr-09
Dec-08
Jan-09
Dec-08
Oct-08
Nov-08
Sep-08
Jul-08
Aug-08
Nov-08
120
Jun-08
Apr-08
May-08
Mar-08
1.2
1.1
Jan-08
USD/JPY Rate
110
100
90
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
80
Feb-08
After coming under renewed pressure on dire UK 2009 Budget
news, the GBP gained some composure this week assisted by
the improved market sentiment and some tentative signs of
stabilization in the domestic economic activity (i.e April’s Land
Registry house prices, CBI Distributive Trades survey).
Although a lot of bad UK news appears to be already in the
prices, GBP downside risks remain. UK fundamentals still look
bleak with the IMF expecting UK growth to shrink in both 2009
and 2010 (-4.1% and -0.4% respectively) and Managing
Director Strauss-Hahn suggesting that Chancellor Darling’s
forecast for a recovery towards the end of this year seems too
optimistic. Heightened worries over the country’s dire public
finances after Mr. Darling upped his forecast last week for
government borrowing to a record GBP 175bn in fiscal year
2009/2010 (12.4% of GDP), add to GBP-negatives especially
in view of a possible downgrade of UK’s sovereign credit rating
if fiscal deficits were to rise beyond the government’s central
projection. UK 5-yr sovereign CDS spread resumed its uptrend
climbing above 100 this week after easing near 85bps earlier
this month ahead of the presentation of the 2009 Budget
statement and the announcement of a much higher than
expected sovereign bond issuance program
The outbreak of swine flu – which bodes well for Swiss
pharmaceutical companies’ outlook - and the increased
likelihood that Switzerland and the US will reach an
agreement on tax evasion, saw the EUR/CHF declining
to 1.5015 this week, the lowest level since the SNB
intervention on March 12. With the pair approaching the
psychologically important 1.5000 threshold, risks of a
new SNB intervention are certainly on the rise with SNB
Vice President Hildebrand warning just a few sessions
ago that the CB will continue to pursue intervention for
as long as the risk of deflation remains. In this respect,
the release of Switzerland’s April CPI data next week
(May 7) will be closely watched after the March headline
CPI fell into negative territory for the first time in over
50 years.
Feb-08
Coming on the heels of a recent bulk of less dire-thanexpected US macro data and Q1 corporate earnings results,
Paraskevi
Petropoulou
the
FOMC statement
helped market participants look though
G10 Markets
Analyst
swine-flu
related
concerns that were prevailing in the early
part
of this week. Improved market sentiment saw JPY-crosses
[email protected]
recovering from recent losses with the EUR/JPY bouncing close
to the 131.00 level on Thursday after plunging to seven-week
lows near 124.30 earlier this week. Positioning re-adjustments
ahead
of Phoka
a long local holiday in Japan also had some impact.
Galatia
The EUR’s gains against the Japanese currency spread to the
Emerging Markets Analyst
EUR/USD which advanced to three-week highs of 1.3380 at
[email protected]
the
same day, recovering from multi-session lows close to
1.2950 seen just two sessions ago. With market participants
taking some comfort from the recently tentative signs of
stabilization in economic activity from both side of the Atlantic,
the EUR/USD is likely to enjoy some near-term support.
However, with the market eagerly awaiting the official results
of the US stress tests and the outcome of the forthcoming ECB
meeting on May 7 - especially as various board members have
lately expressed differing opinions on the future course of
monetary policy- it is questionable whether the pair’s latest up
move can extend much further (the pair was trading close to
1.3310/12 at the time of writing). Technically, a sustainable
break above the 1.3380/13410 resistance zone could shift
market’s focus back towards 1.3580 (April 6 high) ahead of
the post-FOMC high of 1.3740 recorded on March 19. On the
flip side, a sustained move below 1.2960 recent lows (April 28)
could provide momentum from further weakness towards
1.2880 or even lower levels especially if the US stress tests
deliver negative surprises.
(GBP 200bn in FY 2009/10). Moody’s reported early this
week that the UK’s triple-A rating is assured. However,
the rating agency made clear that it will continue to
scrutinize closely the UK finances. Against this
background, there is little to suggest that the GBP/USD
is poised for a more sustained upward move (e.g. say
levels past 1.5300 from ca 1.4820/25 at the time of
writing).
Jan-08
Following the conclusion of its two-day meeting on
Wednesday, the FOMC decided unanimously to hold the Fed
Funds target rate stable within 0.0-0.25%, as expected. In the
Platon Monokroussos
accompanying
statement, the FOMC said that the economic
Head ofhas
Financial
Markets
outlook
improved
modestly since the March meeting and,
Research
though the economy continued to shrink, the pace of
[email protected]
contraction
appears to be somewhat slower. Moreover, the
FOMC acknowledged that inflation could be too low for some
time and reiterated its determination to support domestic
economic activity.
4
Research Team:
Gikas Hardouvelis, Chief Economist and Director of Research
Platon Monokroussos, Head of Financial Markets Research
Paraskevi Petropoulou, Economist
Galatia Phoka, Economist
Sales Team:
Fokion Karavias, Treasurer
Nikos Laios, Danai Manoussaki, Kostas Karanastasis
EFG Eurobank Ergasias, 8 Othonos Str,GR 105 57, Athens,Tel:(30210) 3718 906, 3718 999, Fax:(30210) 3337 190, Reuters Page: EMBA,Internet Address:
http://www.eurobank.gr
Disclaimer: This report has been issued by EFG Eurobank – Ergasias S.A and may not be reproduced or publicized in any manner. The information contained and the
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