While Piazza Affari loses 2.7% and Wall Street futures are in the red for more than 1%, markets are buying long-term German and American government bonds and BTP sales have begun. Indeed, the Bund went from -0.3% to -0.323% this morning, the equivalent Italian bond from 0.73% to 0.743% awaiting the ECB at 13:00 and the revision of the monetary policy strategy of the Central Bank European. Specifically, the curve between the 5-year and 30-year T bonds is flattening, an important indicator for investors, because it means that there is no confidence in a structural economic recovery.
The 5-year Treasury yields 0.734% against 0.36% at the start of the year, while the 30-year US bond has gone from 2.5% in March to 1.88% today. “The spread between the two in mid-May was 1.56%, today 1.13%”, Lorenzo Batacchi, portfolio manager of Bper and member of Assiom Forex, explains to milanofinanza.it. “The markets are analyzing the trend of the Covid variants to understand if, after the latest disappointing data from China, problems related to global growth may emerge. At the moment the market does not believe in a long-term normalization”.
And this is why today’s speech by Christine Lagarde, governor of the ECB, “is so important, precisely because it focuses on inflation”, adds Batacchi. “If until a year ago the Frankfurt target was rigid, at 2%, today the market expects Lagarde to use different words, for example towards greater tolerance on higher inflation for some time. The markets, in any case, they consider the interest rate curve to be important and when it flattens out like today, it is not a good sign “.
According to Unicredit analysts, purchases on 10-year US Treasuries can also be linked to a move to cover short positions (the yield has gone from 1.30 to 1.27% today). “Hedging is probably a factor to consider because fundamentals and market sentiment were constructive,” the bank analysts explain. The release of the minutes of the Federal Open Market Committee last night did not change the general picture of the markets, but it did help the US equity indices, the S&P 500, the Nasdaq 100, to close again at record levels, the analysts add. Today, however, Asia closed in the red on the one hand due to doubts about the effects of the expanding Delta variant, and on the other hand on the war that Beijing is waging against the tech giants.
According to CapitalStructure, the subsidiary of Covenant Review, issuance of euro-denominated high-yield corporate bonds hit record highs during the second quarter of the year, with companies stepping up issuance ahead of the summer. The volume of European high yield (higher risk) bonds last June was around € 18.05 billion, well above the € 12.6 billion issued in May. This was the highest figure since early 2016, according to CapitalStructure.
Meanwhile, the cost of insuring against the defaults of so-called European junk bonds (junk bonds or high yield bonds) increased sharply today, in parallel with the weakening of markets’ risk appetite following the publication of the Federal minutes last night. US Reserve from which signs of tapering emerged earlier than expected. The iTraxx Europe Crossover Index, which tracks high-yield credit default swaps in euros, rose 6 basis points to 237 points (2.37%) in initial trading, the highest level since June 21, according to data from IHS Markit.
Today, the yield on 10-year German Bunds is trading below -0.30% for the first time in about three months before the European Central Bank announced the revision of its monetary policy strategy. The key point for the financial markets will be whether Frankfurt is willing to increase the flexibility of its regular asset purchase program, the App, along the lines of the Pandemic Emergency Purchase Program, explains Unicredit. “It is easier to predict that there will be a change in the definition of price stability”, add the analysts of the Milanese baca. (All rights reserved)
