Bond Markets Suggest Greece Still A Concern, Euro To Remain Soft


The US dollar was mostly softer vs. the majors on news that Greece requested that EU/IMF aid be activated.  EUR/USD rose on short-covering rally as a result, and came after it had earlier set a new cycle low at 1.3201.  We think pressures will remain on the euro and euro zone outlook this week, as Greek yields remain elevated despite news of EU/IMF aid request (see below).  Yen was softer across the board and dollar/yen spiked above 94 after setting an outside up day Thursday.  Biggest gainers on the day vs. USD were HUF, RON, SEK, NZD, and PLN, while only losers vs. USD were JPY, AUD, and CLP.  EM currencies were mostly stronger.  US data had little impact as markets focused on Greece, even though durable goods orders ex-transport rose 2.8% vs. 0.7% expected and new home sales surged 26.9% vs. 5.5% expected.  Fidesz won two thirds majority in second round elections in Hungary, returning Viktor Orban to power.  G20 split on bank tax, asked IMF to study issue further.  FOMC is this week’s big event.

US equity markets were higher, with DJIA, S&P, and NASDAQ up 0.6%, 0.7% and 0.4%, respectively.  European markets were higher too, with Euro Stoxx 50 up 0.7%.  Asian equities are likely to open flat today as Asian ADRs were flat during N. American trading Friday.  Nikkei futures point to an up open for Japan and the soft yen should help Japan exporters.

US bond market was lower, as 2- and 10-year yields were up 4 bp and 4 bp, respectively.  European bond markets were mixed, as 10-year yields in UK, France, and Germany were up 6 bp, flat, and up 1 bp, respectively.  Greek 10-year yields fell 18 bp, Portugal rose 1 bp, Italy rose 1 bp, and Spain rose 4 bp.  Greek short end remained weak, with 2-year yields flat after rising 244 bp Thursday.     

Currency Markets
Though we suspect much of the weekend G20 meeting focused on Greece, the official communiqué did not mention it.  Still, some comments afterward bear noting.  IMF’s Strauss-Kahn stressed that talks with Greece have accelerated and sees a program “in time” for Greece to meet its needs.  Canada Fin Min Flaherty candidly admitted that some countries are worried that the Greek package is too small.  German press quoted senior lawmaker from Merkel’s ruling coalition said Greece should consider exiting euro zone, but Fin Min Schaeuble opposes it.

There are reports that German Finance Minister Schaeuble tried to attach the authorization for the Greek backstop facility in order to speed up implementation.  However, this path reportedly was blocked and his fallback plan is for a parliamentary meeting on Monday.  This would seem to lend support to ideas that the IMF’s part of the facility may be exercised first.  Developments do highlight the fact that EU aid is still progressing at a snail’s pace.  German Chancellor Merkel’s CDU Deputy Parliamentary Head Meister said that it will wait for EU/IMF talks with Greece to end before pushing for a “transparent and quick procedure” to get the aid through parliament.  Those talks were originally planned to go on for a couple of weeks, but this week’s developments should see those talks end within days.  Schaeuble reportedly said earlier this week that his government could get the necessary Greek aid legislation through parliament within about 10 days.  Newswires report that a group of German academics are already preparing a legal challenge to the aid bill, and will mount it once the bill passes.  Despite all the risks of delay, Greece theoretically does not need the funds until closer to mid May.  The Greek 10-year bond yield remains above 8% (now at 8.59%, 2-year at 9.9% vs. 10.6% earlier).  While these levels are well off this week’s panic extreme levels, it still reflects a high degree of anxiety and we note that the other peripheral bond markets have not shown nearly as much a recovery from the recent slide.  For example, Portuguese 10-year yields are down a single basis point and Spain’s yield is up 4 bp. This is leaving the foreign exchange market choppy and thus far inconclusive. We too are not sure that this is sufficient closure, and the euro is already coming off earlier highs.

Bond markets have turned south in Europe, as investors may be coming to the realization that the aid plan in no way ends the Greek saga.  Greek 2-year yields had fallen below 10% on the aid news, but are now at 10.23% and up 9 bp on the day.  Ominously, Portugal 2-year is doing worse, with its yield up 10 bp on the day but still at a comparatively low 2.94%.  In the 10-year space, Greece yield is down 17 bp on the day to 8.67% and Portugal is down 3 bp to 4.89%.  Given what we now know about the Greek aid package, one should think about which way yields in Portugal, Spain, and Greece are likely to move in the coming weeks.  Will Spain and Portugal move up towards Greece or will Greece move down towards Spain and Portugal?  Probably a little of both, but given that we see strong contagion risks still, bond markets may be too sanguine with regards to Spain and Portugal.  Yes, yield spreads on those two have widened out, but not by as much as one might expect given the way the Greek saga has unfolded.  The European response to a small country emergency like Greece was very slow.  Portugal is even smaller, but Spain is almost five times the size of Greece and is the fifth biggest in the euro zone.

Meanwhile, Chile announced plans to sell $1.5 bln worth of bonds abroad.  USD-denominated 10-year tranche will total $1 bln, while CLP-denominated tranche will total $500 mln.  Chile currently has two short-term USD bonds outstanding, due in 2012 and 2013 with tight spreads (+53 bp and +32 bp to USTs, respectively).  Chile remains the strongest EM credit in Latin America, and will have little trouble seeing demand for this bond.  Our Sovereign Rating model together with current market rates for EM USD-denominated bonds suggests that the USD portion of Chile’s 10-year offering would see fair value at around +75 bp, as the chart below shows.  In the 10-year space, Chile is the top EM credit in terms of ratings and fundamentals, followed closely by Israel (2019 trading at +92 bp to USTs) and Korea (2019 at +109 bp to USTs).  Peru 2019, Russia 2020 (just priced this week), and Indonesia 2020 spreads to USTs are in a tight cluster around +140 bp, followed by Brazil 2020 at +154 bp.  Egypt just sold $1.5 bln in USD bonds, made up of $1 bln 10-year tranche priced at +200 bp and $500 mln 30-year tranche priced at +233 bp over USTs.  This appears to have been priced slightly cheap to fair value, according to our model.  Poland is considering a 5-year USD bond issue next month for $1 bln, while Ukraine is considering a 10-year dollar bond in June.  Indonesia is thinking about a samurai bond worth $1.1 bln, while Thailand is thinking about a samurai worth $2.1 bln (see our SpecialFX:  A Swift Proposal for Greece:  Guaranteed Samurai?).  It’s a real testament to how strong EM prospects are right now that these EM credits can place foreign currency debt even as European debt markets melted down last week.

CFTC data shows that for the week ended Apr 20, speculative accounts mostly increased their strong US dollar bets.  Net short euro positions rose to -71,424 from -55,464 previously.  Swiss franc net shorts increased to -5,382 from -4,954, while sterling net shorts eased to -49,298 from -57,391 previously.  The dollar bloc saw their net long positions ease slightly, with the exception of NZD where net longs rose.  MXN saw net longs decrease to 110,152 from 112,226 previously.  Speculators cut net short yen positions to -50,338 from -55,746 previously.  Given the softer yen last week, net yen shorts should increase in the next weekly report.  
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Asia: Singapore IP Europe/EMEA: Czech confidence; Sweden trade; Turkey capacity utilization; Hungary, Israel central bank meetings Americas:  US Dallas Fed manufacturing activity.  No US speakers of note.


This was the BBH CurrencyView by Marc Chandler. Marc is the Global Head of Currency Strategy at Brown Brother Harriman. For more of BBH’s currency views, visit the BBH FX website here.

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