11 January 2012 – “Hold the line” (Toto, 1978)

11 January 2012 – “Hold the line” (Toto, 1978)

Mildly flattish to softer open after a softer NY close from its top, once European equities had gone home. Investors faced with the choice of another small dozen of international issues right at the opening bell with all new issue spreads taking into account late supply and thus ever wider, or at least as generous as before, hence undermining any tightening in the secondary market until finally digested.

Equity markets turned sour by noon, although credit kept a tighter tone with sovereigns across Europe still in tightening mode with Spain beating everyone else. EZ Q3 growth at +0.1% was no help, pushed EUR down to test the 27 handle and was a reminder about the stall speed of the economy of the overall region. 1.2650 is real support, although we bounced off 1.267 inAsian trading on Monday morning, then 26-figure For chart believer, it gets ugly below there with 1.1875 as target and 1.2450/70s and 1.2330s before that.

French downgrade rumours in the afternoon (denied) were post-ex explanations on the currency movements. Still, overall price action (equities, stocks, sovereigns), ahead of the next two days’ Southern European auctions rather stable, even tame. Holding the line.

Very strong OBL auction with a 2.8 BC at 0.90% yield with investors bidding nearly EUR 9bn for a EUR 4bn auction and solely EUR 3.15bn allocated, as the Bundesbank (as technical organizer of German auctions) retained EUR 850m for market intervention. This is once more a historic record low, beating November’s auction at 1.00%. This result turned around weaker BUNDs at open and stressed once more the attractiveness of the German safe haven. Ok, people were ready to pay up to get German 6m bills (at negative yield) on Monday and despite yesterday’s equity move, it’s not like all clouds have faded. ECB overnight deposits hitting new highs every day (EUR 489bn).

Next to yesterday’s negative yield bill auction in Germany, we’re reminded on a daily basis by the record amounts deposited at the ECB (EUR 482bn) that credit risk perception seems more biased by some than by others. Some deficit revisions (lower for France, probably higher for Portugal and certainly for Greece). Greek 2 years now trading 20% of par, in line with the rest of the curve (PSI deal is “close”, as repeated today). Hungary caving in to EU pressure (good for HUF and Austria).

Why on earth Spanish bond traders decided to pay up the market AHEAD of tomorrow’s auction is rather mysterious, but 2 YRS were up 35 bp tighter, 5s 27 and 10 YRS 19. This takes us back to end of year levels and 70bp tighter than this Monday in 3 YRS, taking us back to the mid December 2010 3% floor hit once and November 2010 levels. Same with 5s and 10s, with the 4, respectively 5% mark…Dios mio! Only saw headlines about falling output, the budget minister warning of recession and needs to backstop both Spanish regions as well as banks. Spanish bonds off the tightest levels late afternoon on slight “risk off” mode, but the auction should better go well now, otherwise the snap back might hurt.

So, spreads to Germany again tighter: Netherlands +37, Finland +44, Austria +127 (-7), France +135, Belgium +250 (-6),Spain +352 (-9) and Italy +518 (-7). Italian 10s 7.00%. BUND futures trading new all-time highs (10 YRS cash still 15 bp from record 1.64%. Curve explanation) and 10 YRS EUR swaps taken along the tightening ride and trading a new historical low of 2.295%.

Primary supply seems to be slightly running out of steam, all the more after yesterday’s strong upmove and as risk action was slightly biased to the negative today. We only had two covered bonds hitting the screen; good names but falling victim, either in price or size (or both), to earlier deals this year that had managed to capture pent-up liquidity. On the senior side, non-EZ banks are still doing round in 4 (UBS), 7 (Standard Chartered) and 10 YRS (DNB). 7 YRS, although not the most usual maturity, remains the sweet spot these days in seniors and corporates, knowing that 200+ spreads squeeze out at least 4% in yield. One single, although sizeable corporate name with EDF raising EUR 2bn 10 years. EIB issued this year largest transaction with a EUR 5bn 3 YRS deal, priced at +38bp. Books grew to over EUR 10bn, but one ought to bear in mind that last September EIB was issuing 10s at +20, so historically the relative level is attractive.

Nice USD domestic corporate deal last night with Sabmiller going for a USD 7bn (!!!) 4-trancher to quench investors’ thirst (Biggest USD corporate deal since another foodie deal for USD 9.5bn by Kraft in Feb 2010) .Computer, Food, Beer: These are the real value and security propositions in the markets.