Global Bond Rout Returns With A Vengeance; 10Y Treasury Tumbles Under Key Support; Futures Pounded

It all started again in Asia, although not in China where the berserker mania bid for stocks has returned and the SHCOMP is now up nearly 5% in the past two days following the PBOC's latest easing, but in Japan where once again the massively illiquid JGB market, of which the BOJ owns roughly a third as of this moment, is going through yet another shock period (if not quite VaR yet) with last night's 10 Year JGB auction seeing the lowest Bid to Cover since 2009.

This was the beginning, and promptly thereafter bond yields around the globe spiked once more, with 10-year Treasury yields climbing to a five-month high, as the global rout in debt markets deepened. The biggest casualty so far is the Bund, which having retraced some of the flash crash losses from two weeks ago is once again in panic selling mode, and while not having taken out the recent 0.8% flash crash wides, traded just shy of 0.75% this morning.

Germany’s 10-year bund yield, the euro area’s benchmark, rose 12 basis points to 0.73 percent and Japanese yields also increased.

Just as notably, treasury bond yields have also spiked, jumping seven basis points to 2.35% and breaching the 2.32% support zone we noted last week.  Recall: "in the instance of 2.27%2.32% is breached, the sell-off would extend further, probably at a fast pace, towards 2.40% and 2.47% next."

With the support now breached, freefall came next and sure enough:


Needless to say, the bond rout has spread to all core and peripheral European markets as well, in what increasingly more as suggesting is merely the ECB selling off bonds in a somewhat "uncontrolled" manner just so it can continue doing QE for another 15 months, instead of being stopped out by -0.20% yields across all curves. It remains to be seen if this too "conspiracy theory" is proven right.

And since in recent day, the bond and equity markets are tied to the hip, US equity futures are sliding fast and confirming once again that Dennis Gartman's newsletter - in both comedic and market fade timing - is unparalleled. Our advice: wait for Gartman to urge being comfortably short in paper money terms here before BTFD.

In any event, European fixed income products have been a key focus for market participants with Bunds (-160 ticks) drifting lower in a continuation of the move seen yesterday with USTs subject to spillover selling from Bunds and heavy corporate issuance this week from the US. Sentiment for fixed income products was also dampened overnight following today’s 10yr JGB auction, which printed the lowest b/c in 6-years. Expectations originally had been for the 10yr JGB auction to be more successful, with Thursday's 30yr auction more a focus for concern. On a technical note, Bund June'15 future contracts currently reside below the 50% retracement (152.24) between last week’s low and yesterday's high, while US 10yr and 30yr yields both trade above the 50% level of the 2014/15 decline.

Higher European yields have continued to weigh on European equites (Euro Stoxx -1.7%) given the subsequent implications for European borrowing costs with macro newsflow otherwise relatively light. Today’s downward pressure has seen the FTSE 100 (-1.7%) give back all post-election gains, while on a sector specific basis, defensive stocks lead the way lower while the DAX (-2.1%) is partially weighed on by BMW (-3.0%), after Audi overtook BMW in luxury car sales in April.

Higher European yields have provided the EUR with some upside this morning with EUR extending on its gains after breaking through 1.1200 to the upside, tripping light Asian based stops and the 100DMA at 1.1219. GBP has shrugged off reports suggesting the UK could consider an EU referendum as soon as 2016 to avoid conflict with French and German elections. Instead GBP has been supported by a beat on expectations for UK industrial & manufacturing data (UK Manufacturing Production (Mar) M/M 0.4% vs. Exp. 0.3%, Prev. 0.4%, Rev. 0.5% & Industrial Production (Mar) M/M 0.5% vs. Exp. 0.0%, Prev. 0.1%), with corporate and leveraged demand touted in the pair. GBP/USD broke above its 200DMA to the upside at 1.5624; with the pair having previously not traded above this DMA since Aug 2014. Elsewhere, AUD has managed to hold onto its overnight gains after breaking above 0.7900, amid cross related flows following encouraging Australian home loans and investment lending data.

In the commodity complex, energy prices have largely been swayed by the broadly weaker USD (-0.9%) with WTI (+USD 0.98) and Brent (+USD 1.21) trading higher amid light newsflow. However, despite this morning’s gains, the market has ignored a note from Goldman Sachs warning that crude prices could face selling pressure in the near-term due to rising oil  stockpiles, with the recent upturn in prices leading to the possibility of US shale drillers adding to the surplus. In precious metals markets, both spot gold and silver trade relatively sideways. Today also sees APR crude oil inventories, after last week’s inventory (-1500k) showed the first drawdown in stockpiles since Jan 6th. Elsewhere, overnight iron ore reached 10 week highs after a lack of imported iron ore led to the consumption of port reserves thus driving up prices.

In summary: European shares remain lower with the autos and financial services sectors underperforming and bank, oil & gas outperforming. Most European bond yields rise, Japanese 10-year bond yield gains. U.K. industrial output exceeds forecasts, pound climbs to 2015 high. Fed’s Dudley says interest rate increases will mark regime shift The German, U.K. markets are the worst-performing larger bourses, Italian the best. Euro is stronger vs dollar. German 10yr bond yields rise; Japanese yields increase. Commodities gain, with nickel, corn underperforming and Brent crude outperforming. U.S. monthly budget statement, small business optimism, JOLT job openings due later.

Market Wrap

  • S&P 500 futures down 0.7% to 2083.4
  • Stoxx 600 down 1.7% to 394.6
  • US 10Yr yield up 6bps to 2.34%
  • German 10Yr yield up 11bps to 0.72%
  • MSCI Asia Pacific down 0.2% to 151.5
  • Gold spot up 0.4% to $1188.5/oz
  • 6.5% of Stoxx 600 members gain, 92.8% decline
  • Eurostoxx 50 -1.8%, FTSE 100 -1.7%, CAC 40 -1.6%, DAX -2%, IBEX -1.7%, FTSEMIB -0.8%, SMI -1.1%
  • Asian stocks fall with the Shanghai Composite outperforming and the Sensex underperforming
  • MSCI Asia Pacific down 0.2% to 151.5; Nikkei 225 little changed%, Hang Seng down 1.1%, Kospi down 0%, Shanghai Composite up 1.6%, ASX up 0.9%, Sensex down 2.4%
  • Euro up 0.99% to $1.1265
  • Dollar Index down 0.73% to 94.32
  • Italian 10Yr yield up 10bps to 1.87%
  • Spanish 10Yr yield up 11bps to 1.86%
  • French 10Yr yield up 11bps to 1.01%
  • S&P GSCI Index up 1.3% to 447.9
  • Brent Futures up 2.1% to $66.3/bbl, WTI Futures up 1.8% to $60.3/bbl
  • LME 3m Copper up 1.1% to $6432.5/MT
  • LME 3m Nickel down 1.1% to $14120/MT
  • Wheat futures down 0.1% to 480.5 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

  • Bunds drift lower in a continuation of the move seen yesterday with USTs subject to spillover selling from Bunds
    and heavy corporate issuance this week from the US.
  • European yields have continued to weigh on European equities given the higher borrowing costs for European
    companies, with FTSE lower by 1.7%, giving back all post-election gains.
  • GBP trades above its 200 DMA, bolstered by strong UK industrial & manuf
  • Treasuries slide led by long-end as rout in EGBs continues; quarterly refunding begins today with $24b 3Y notes, WI yield 1.06% vs 0.865% in April, 1.104% in March.
  • Although the timing is uncertain, the Fed’s first rate increase since 2006 will usher in a “regime shift” that will stir financial markets when it occurs, said New York Fed President William C. Dudley
  • Greece handed the ECB an excuse to maintain life support for its financial system by persuading its skeptical German-led creditors it’s serious about delivering the policies needed to escape a default
  • Greece used up ~EU650m reserves from its SDR IMF holdings account to meet loan payment of ~EU750m due to IMF today,  Kathimerini newspaper reports, without citing anyone;  Reserves kept in IMF holdings account need to be replenished within one month
  • IMF has signaled to Eurogroup that it doesn’t want to participate in a potential rescue of Greece, Spanish newspaper El Mundo reports
  • China adopted the IMF’s standards for its latest balance of payments data as the nation seeks to obtain reserve-currency status for the yuan
  • Japan sold 2.4t yen ($20b) in 10Y bonds at average yield of 0.434%, highest since Dec. 2014; 2.24 bid-to-cover lowest since Feb. 2009, down from 2.75 at previous auction
  • U.K. industrial production rose 0.5% in March, the most in six months and higher than forecasts for no change
  • A magnitude 7.3 earthquake struck Nepal on Tuesday less than three weeks after a temblor killed more than 8,000 people in the Himalayan nation
  • Sovereign bond yields surge.  Asian stocks mostly higher, European stocks tumble, U.S. equity-index futures decline. Crude oil, gold, copper higher

US Event Calendar

  • 9:00am: NFIB Small Business Optimism, April, 96.0 (prior 95.2)
  • 10:00am: JOLTS Job Openings, March (prior 5.133m)
  • 2:00pm: Monthly Budget Statement, April, est $138b (prior $106.9b)

Central Banks

  • 12:45pm: Fed’s Williams speaks in New York
  • 5:05pm: Reserve Bank of New Zealand’s Wheeler holds news conference in Wellington

DB's Jim Reid concludes the overnight recap

Most bond markets in Asia this morning have generally tracked yesterday’s weakness with 10y yields in Japan (+4.6bps), Hong Kong (+5.8bps), South Korea (+4.3bps) and Australia (+13.6bps) higher as we go to print. It’s a bit more muted in the Treasury market meanwhile with the 10y benchmark yield (-0.7bps) modestly paring back some yesterday’s lurch higher in yield. Elsewhere equity markets are trading with little obvious direction with the Nikkei (-0.38%) and Hang Seng (-0.32%) both lower and the Shanghai Comp (+0.66%) and ASX (+0.68%) firmer. Credit markets in Asia are around a basis point wider.

The weakness in Treasuries was in fact led by the longer end yesterday with the yield curve bear steepening. 30y yields finished 14bps higher to close back above 3% at 3.041% for the first time since December 2nd. The closing level is the highest since November 20th. 5y Treasuries meanwhile closed 11.2bps higher at 1.601%. As mentioned the sell-off appeared to be a continuation of the weakness in the Europe session with the rally that we saw in Bunds on Friday lasting for all of one day. Yesterday 10y Bund yields closed 6.3bps higher at 0.608% and in other developed bond markets Netherlands (+6.5bps), Sweden (+5.0bps), Switzerland (+1.8bps) and France (+6.5bps) all saw yields moves higher. Peripherals also softened with Italy (+9.1bps), Spain (+8.3bps) and Portugal (+8.9bps) was once again underperforming.

In terms of Greece yesterday and specifically the Eurogroup meeting, as we’d come to expect, there was little material new news to come out of the meeting. Instead, the commentary centered around more progress being made but not enough yet to warrant a release of funds to Greece. A joint statement put out after the meeting between the two sides said that ‘we welcomed the progress that has been achieved so far’ but that ‘at the same time, we acknowledged that more time and effort are needed to bridge the gaps on the remaining issues’. Eurogroup President Dijsselbloem backed this up saying that ‘I’m not satisfied but just a bit more optimistic, the way the talks take place in the way they negotiate has been improved’. Despite Varoufakis saying that there was some considerable convergence between the sides, he reiterated the fragile liquidity situation that Greece finds itself with and when asked about a potential timeframe for when cash may run out, commented that ‘we are talking about the next couple of weeks’.

Interestingly however and with talks dragging on, German finance minister Schaeuble seemingly didn’t downplay the issue of Greece holding a potential referendum, saying that ‘if the Greek government thinks it should hold a referendum, it should hold a referendum’ and that ‘maybe it would even be the right measure to let the Greek people decide whether they’re ready to accept what needs to be done’. Any support towards a referendum from the European side will be important given the distinct possibility that Tsipras is unable to pass any sort of agreement through parliament. In the mean time and with cash seemingly close to running out, news of yesterday’s ‘progress’ and also the news that a transfer order was put in for the €750m IMF payment due today may help ease some of the worries over any potential haircut increase by the ECB tomorrow.

Away from the moves in bond markets yesterday, it was fairly subdued in markets elsewhere. The S&P 500 (-0.51%) and Dow (-0.47%) both fell while the Dollar closed 0.23% higher (DXY). In Europe equity markets were a tad more mixed with the Stoxx 600 (+0.29%) higher although the CAC (-1.23%) and the DAX (-0.31%) both fell. Energy stocks certainly contributed to the weaker showing for US equities as the component led declines (-2.05%) with Noble Energy (-6.23%) in particular weaker. The market appeared to react negatively to the news that the company is set to buy Rosetta Resources in what will be the first major shale deal since the collapse and selloff in oil - a potential early sign that M&A is returning to the sector. Oil markets actually bounced off their intraday lows but still closed down yesterday with WTI (-0.24%) and Brent (-0.73%) declining to $59.25/bbl and $64.91/bbl respectively. Gold was 0.37% lower at $1184/oz.

Fedspeak yesterday was confined to the San Francisco Fed’s Williams who suggested that the Fed should not telegraph rate hikes and instead let economic data dictate while accepting that fewer hints out of the Fed could lead to volatility in markets. As a result Williams reiterated that every meeting is a possibility and therefore on the table for liftoff, before going on to say that he expects growth to bounce back in Q2 with unemployment potentially back down to 5% or below by the end of the year. Williams, like other recent Fed commentators, noted that he believes the weak Q1 was a ‘big anomaly’.

Elsewhere, it was a very quiet day on the data front with no releases in the European session other than the Bank of England holding rates at 0.5% as expected and just a secondary release in the US session with the April labour market conditions index declining to -1.9 from -1.8 previously.

In terms of the day ahead, the calendar picks up slightly today with French business sentiment and UK industrial and manufacturing production due out this morning. Over in the US this afternoon, the April NFIB small business optimism reading is the early print and we follow this up later in the day with more employment data in the JOLTS job openings report for March and also the April monthly budget statement.