Market Talk October 5th, 2015
The market reaction to the US 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 which has also carried into the European opening but
interestingly – only for equities. The reaction in the bond markets is
we have seen US 10’s 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 US 10’s
trading unchanged at 1.995% while Bunds are slightly higher at 0.555%.
Talk between dealers after the US
employment report is of the possibility of the Fed return to
aggressive QE especially as the market re-prices the possibility of the a
2015 hike to around 8%. That talk has been around in Europe for a while
so are we now due for the markets to start to re-price this
differential. Government bonds at the front-end are already trading with
negative yields as we also see in the interbank market but 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 which has already been priced in.
In peace times 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 they are looking to now
issue even longer and longer term debt. As syndicate desks began to
discuss this in the morning, there has been actually an argument to
issue 100 and 150 year bond issues.
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