The market reaction to the U.S. data on Friday has confused many with both stocks and bonds bouncing into the close. Overnight, the Asian equity markets have continued the positive response. This has also carried into the European opening but interestingly only for equities. In the reaction in the bond markets, we have seen U.S. 10s remain just under the psychological 2% but the spread against German bunds is where the interest is playing out. The TY/RX spread has tightened this morning by 4bp to +144bp with U.S. 10s trading unchanged at 1.995% while bunds are slightly higher at 0.555%.
Talk between dealers after the U.S. employment report involves the possibility of the Fed’s return to aggressive QE, especially as the market re-prices the possibility of a 2015 hike to around 8%. That talk has been going around Europe for a while so are we are due for the markets to start re-pricing this differential. Government bonds at the front-end are already trading with negative yields, as we also see in the interbank market. With banks offering either negligible or zero interest rates on saving/checking accounts, banks are saying they do not need money.
Within Europe MR, Draghi has already talked of increasing government bond purchases from 25% to 33% of single issue and in the quasi-sovereign market they already own roughly a third in total that has already been priced in.
In times of peace, the weapon of war is currency and that has already started to play out with the Emerging Markets. Latin America, with the declining Argentinian peso and Brazilian real, is suffering significantly and are now looking to issue even longer long-term debt. As syndicate desks began to discuss this in the morning, there has been an argument to issue 100 and 150-year bond issues.