5 Sep 2013
Bonds edged higher; Syria’s the focus of G20
FXstreet.com (Athens)- Bond yields higher, with benchmark US 10-years brushing the 2.90 level once again.
The most intriguing issue regarding fixed income, is that from recent days is that the short-end of the US yield curve has sprung to life. To elaborate on, the 2-year US swap rate has jumped 10bps since 27th August and as a result the 2-year swap spread over Japan has widened out to 38bps, the widest margin since the end of 2011. Furthermore, US Treasury curve collapsed to flattest in 13 months. The spread between 5Y Treasuries and 30Y has plunged over 30bps in the last month and now hovers just above 200bps - its lowest in 13 months. This bear-flattening (belly and short-end is underperforming notably overnight) has driven the market's implied 10Y rate for year-end over 3% for the first time since July 2011. The entire forward curve of the Treasury complex is re pricing higher in rates as 'absolute' NIM expectations drop.
All in all, as Syria continues to grab the headlines, we expect further movement in Treasuries which may have a continued effect on Bunds in Europe. Gaël Gunubu, Head Analyst in Fixed Income research Deutsche Bank AG suggests that “Although credit has had a bit of a bumpy ride over the past couple months due to an increasingly volatile rate environment, our DB rates strategists feel that any tapering expectations due this month from Bernanke are already priced in." and “he trend at least in the European market has been for higher coupon bonds to sell off relative to their lower coupon peers in the 1-2Yr maturity timeframe. In the short term, buyers may be wary of owning high risk/high coupon bonds until a more settled rates environment calms the market. On a longer 5-7Yr maturity basis, we actually see no correlation between performance and coupon rate." Last but not least, “Contrary to popular perception short-dated, high coupon bonds have seen a sell off as of late; longer dated bond performance has little correlation to coupon rate.”
The most intriguing issue regarding fixed income, is that from recent days is that the short-end of the US yield curve has sprung to life. To elaborate on, the 2-year US swap rate has jumped 10bps since 27th August and as a result the 2-year swap spread over Japan has widened out to 38bps, the widest margin since the end of 2011. Furthermore, US Treasury curve collapsed to flattest in 13 months. The spread between 5Y Treasuries and 30Y has plunged over 30bps in the last month and now hovers just above 200bps - its lowest in 13 months. This bear-flattening (belly and short-end is underperforming notably overnight) has driven the market's implied 10Y rate for year-end over 3% for the first time since July 2011. The entire forward curve of the Treasury complex is re pricing higher in rates as 'absolute' NIM expectations drop.
All in all, as Syria continues to grab the headlines, we expect further movement in Treasuries which may have a continued effect on Bunds in Europe. Gaël Gunubu, Head Analyst in Fixed Income research Deutsche Bank AG suggests that “Although credit has had a bit of a bumpy ride over the past couple months due to an increasingly volatile rate environment, our DB rates strategists feel that any tapering expectations due this month from Bernanke are already priced in." and “he trend at least in the European market has been for higher coupon bonds to sell off relative to their lower coupon peers in the 1-2Yr maturity timeframe. In the short term, buyers may be wary of owning high risk/high coupon bonds until a more settled rates environment calms the market. On a longer 5-7Yr maturity basis, we actually see no correlation between performance and coupon rate." Last but not least, “Contrary to popular perception short-dated, high coupon bonds have seen a sell off as of late; longer dated bond performance has little correlation to coupon rate.”