Volatility is still the name of the game. Initial optimism following the Credit Suisse – UBS deal, brokered by the Swiss government over the weekend, abruptly ended in Asian dealings. US yields reversed a 18 bps move higher to trade more than 20 bps lower as European investors braced for the open. German yields even topped that, going down almost 30 bps (2y) shortly after the bell. The sharp risk-off repositioning originated from a specific niche in the bond market: AT1 (perpetuals, CoCo’s…). Under the CS-UBS deal, AT1 bondholders see all of their invested capital (CHF 16bn) wiped out in the take-over whereas shareholders still recoup a little. Investors knew the risks when loading up these notes but assumed that they’d still get priority over pure equity. It caused heavy risk premia repricing that spilled over into other parts of the market. European regulators – the ECB Banking Supervision, Single Resolution Board and European Banking Authority – in a statement about the loss-absorbing approach rushed to make clear that common equity instruments are the first ones to take the hit. Only after their full use, AT1 would be required to be written down, it added. After the initial shock reaction in European dealings, the dust settled a bit. Staving off an imminent collapse of a G-SIB was seen as the critical trading theme while the regulators’ statement also helped. German bond yields capped losses to just 5.9 bps at the front while adding a few bps further out. US yields trade 2.9-6.3 bps higher. European stocks swapped losses (up to 2% in the Euro Stoxx 50) for gains of >1%. WS adds 0.4-0.90%.
The dollar wasn’t really able to profit from the early European risk-off. It went no further than EUR/USD 1.064 before a reversal together with the general mood kicked in. The pair is currently changing hands in the 1.072 area, testing the 50dMA. The trade-weighted index is testing support at 103.35 (50% retracement of the Feb-Mar upleg) – down from an intraday high at 103.96. The Japanese yen gave back earlier gains. USD/JPY is trading little changed around 131.62, EUR/JPY bounced back from 138.83 to 141.05.
ECB President Lagarde appears before the European Parliament today as we finish this report. In her prepared remarks, she stuck to the message delivered at last Thursday’s ECB policy meeting during which she decoupled a potential liquidity crisis/financial stability issues from the need to tighten monetary policy further to address high and above-target inflation. French governor Villeroy early this morning also kept the focus on (underlying) inflation, adding that last week’s rate hike showed confidence in European banks. ECB’s Kazaks joined Villeroy and said more hikes are needed if the baseline holds up. He said that it is easier to repair if you hiked too much than the other way around. The Greek Stournaras struck a different chord, saying that rate hikes are mostly a story of the past.
News & Views
Polish data as published this morning showed a mixed picture. PPI inflation in February declined -0.4% M/M. However, due to an upward revision of January data, Y/Y PPI declined only modestly from 20.1% Y/Y to 18.4% (17.7% expected). Sold industrial output rose below expectations at 0.4% M/M bringing output 1.2% below the level of the same month last year. Average gross wages on the other hand continue to rise at faster pace than expected (2.6% M/M and 13.6% Y/Y) Employment dropped 0.1% M/M to be 0.8% higher in a Y/Y perspective, but the soft February figure followed a strong 0.4% M/M rise in January. Recently, several NBP MPC members were reluctant to provide concrete guidance on the start of a rate cut cycle, potentially at the end of this year, as it wasn’t supported by the inflation projections yet. Recent market turmoil slightly lowered Polish short-term yields while the negative impact on the zloty is modest for now. EUR/PLN currently trades in the EUR/PLN 4.705 area.Belgium today sold bonds from 3 existing series at regular bond auctions for a total amount for 3.902 bln. The Belgian Debt Agency sold €1.542 bln of bonds due in June 2033. The bid cover ratio came out at 1.69. The bonds yielded 2.778%. The Kingdom also sold €896 mln of bonds to come due in April 2039. The sale also recorded a 1.69 bid-cover ratio and was sold at yield of 3.036%. A 1.497 bln sale of bonds mat
uring June 2027 attracted investor interest to a bid-cover ratio of 1.45. The sale resulted in a weighted average yield of 2.37%. The Belgian Debt Agency’s 2023 funding plan foresees an issuance of EUR 45.00 billion of OLOs, and EUR 2.00 billion of EMTN & Schuldscheine. As of February 28, 26.5% of the funding plan has been achieved.