The minutes of the last FOMC meeting, released on Wednesday, revealed that several Fed members thought that tapering will likely be warranted soon, which we already knew. About half saw bond buying ending late this year, which is slightly earlier than most of the market is factoring in, with spring 2014 the most popular choice.
Many members, however, thought that labour market improvement was needed pre-taper and some felt exit strategy discussions were premature, which was mildly dovish, as was the perception that very low rates were likely to be appropriate for a considerable period of time after the end of QE.
That contrasting mix of hawkish and dovish sentiment had very little effect on the market, mainly because the minutes did not actually reveal anything new.
There was little ambiguity from the Fed Chairman, though, in the Q&A session that followed his speech on the Fed’s past and future in Cambridge, Massachusetts.
Bernanke reassured what have become highly jittery markets by saying that “highly accommodative monetary policy for the foreseeable future is what’s needed”. He went further by stating that the inflation and employment situation signal that more stimulus is required and reiterated that the 6.5% unemployment rate is a threshold, not a trigger.
And he quite logically added that the market volatility of the past six weeks could have been much worse if he had kept silent on plans for tapering, misleading investors into thinking the asset purchases could go on forever.
Cue a major rally across most asset classes. 10yr Treasuries leapt by over a point in seconds. Gold rushed up by 3%, EM bonds surged, and equities rallied, taking Dow and S&P futures up 1% in after-hours trading.
The only asset to depreciate was – predictably enough – the dollar.
And the feelgood feeling continued in Asia overnight. The Hang Seng finished up a whopping 530 points, a gain of over 2%. The Shanghai Composite fared even better, closing up 3.2%. The only minor disappointment was the Nikkei closing up only 56 points after the BoJ left rates and monetary policy unchanged.
Almost inevitably that saw synthetic credit markets off to the races on the open in Europe. The iTraxx Main opened up 4.5bp tighter at 105bp, taking out Tuesday’s low of 106bp to trade at its lowest level since July 6. The Crossover was 18bp tighter at 432bp, over 100bp in from the wides seen in the aftermath of the FOMC meeting on June 24.
And the indices continued to hover around those opening levels in the run up to the main event of the European morning, namely the Italian Tesoro’s taps of 3 and 30yr BTPs.
The Tesoro sold a total of €4.846bn across the two issues, toward the upper end of the expected €4-5bn range. The 3-year on offer, BTP2.25% May 2016, attracted a bid-to-cover of 1.34:1 on a fill of €3.385bn, which was bang on the cover at the last auction of the bond on June 13. The 30yr, BTP4.75% Sep 2044, which was syndicated in the middle of May, attracted a cover of 1.30:1 on the balance.
As ever with Italian auctions, though, the key to investor demand lay in the pricing. The 3yr priced at an average yield of 2.33%, which was 4bp through the offer side of the market as the bidding deadline expired. The average yield on the 30yr was 5.19%, which was a scant 1bp through the offer side. Given the primary dealer concession, that was relatively weak, indicating a primary dealer led affair with little investor demand, which may have been a consequence of S&P’s downgrade of the sovereign on Tuesday night.
Those weak results saw broader credit hand back some of those early gains as peripherals sold off, and by 0940GMT according to Tradeweb, the Main was 3.5bp tighter on the day at 105.5bp with the Crossover 13bp tighter at 428bp.
In the run up to the Italian auction, there was some relatively strange price action in the periphery.
Italy traded well initially, with 10yr yields lower by 7bp to 4.34% on the back of the global asset rally. That rally did not last long, though, and in the run up to the auctions those yields shifted back to 4.44% as the market built in a concession for the supply. That concession was even more evident in the target maturities, with 2s/10s flatter and 10s/30s steeper. In the aftermath of the auctions, 10yr yields are at 4.48%, with the curve unchanged from pre-auction levels.
That price action in the 10yr sector of the curve was mirrored in Spain, where yields initially fell 8bp to 4.70% before shifting back to 4.81% into the bidding deadline on some domestic selling. Post-auction those yields are at 4.83%.
In the third tier of the periphery, Portugal is coming under some pressure, with 10yr yields 10bp wider at 6.75%. That widening comes on the back of some vague rumours that the sovereign might request a second bailout after probably misinterpreted comments on the matter from the Portuguese president last night.
In terms of core supply, in the UK, the DMO sold €2.5bn of the 30yr Gilt, UKT3.25% June 2044, with a bid-to-cover ratio of 1.65:1, which was well down on the 2:1 seen at the last tap of the bond on May 16. In terms of pricing, the average price of 94.39 was bang on offer side of the market as the bidding deadline expired with a 7 tick tail. Clearly, the decent RV opportunities and the better tone in the core were not quite enough to attract Gilt investors here.
It has been a highly positive start to the trading session in the financial indices too. The Senior Financials was 6bp tighter at 152bp, and outperformed the broader credit indices by trading down to its lowest level since the middle of June. That is reflected by the spread to the Main trading at 48bp, having spent most of the week hovering around the key 50bp support level. The Italian auction has pared some of those gains, with the SenFin back to 155.5bp. The Subordinated is 6bp tighter at 234bp.
Senior cash markets, however, are once again taking their own sweet time in playing catch-up to the index moves. Spreads are a scant couple of basis points tighter for choice, but flow is lethargic on both the electronic platforms and in the Street.
