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Prospects daily: Greek bonds receive lukewarm response from market

Global Macroeconomics Team's picture

Important developments today:

1. Greek bonds weak following new debt sales

2. U.S. confidence bounces back inMarch

3. Japanese industrial production falls in February


Greek bonds weak following new debt sales. Greek government bonds were under pressure Tuesday amid a lukewarm response to Monday’s new 7-year bond sale. Greece’s sale of a new €5 billion, seven-year bond was oversubscribed by only 1.4 times (possibly due to absence of yield premium over existing debt), which market analysts described as tepid. The yield on Greece’s new 7-year notes rose to 6.14% on the first day of trading, up from 6.001% when issued. The yield premium over equivalent German bunds widened about 12 basis points (bps) to 346 bps. And the yield on Greek 10-year bonds also climbed, rising by 14 bps to 6.47%; the yield spread over comparable-maturity German debt widened by 14 bps to 330 bps, according to Bloomberg. A rise in yield indicates deterioration in investors’ assessment of a country’s debt.

The high cost of borrowing, despite the rescue package agreed on in Brussels last week, comes at a time when the country needs an average of almost €2 billion a month to cover its budget deficit and debt service, according to its deficit-reduction plan. Indeed, the Greek government has warned that the country may not be able to slash its deficit by 4% in 2010 from last years’ 12.7% of gross domestic product if it has to pay very high yields on its bonds.


Source: S&P/Case-Schiller


U.S. home prices post modest decrease. The average price of homes in 20 major metropolitan centers fell a seasonally adjusted 0.4% (m/m) in February according to the latest observations of the S&P/Case-Schiller Home Price Index. At the same time the index fell just 0.7% (y/y) from January 2009, the smallest year-over-year decrease in home prices in three years, following a 3.1% (y/y) fall measured in December 2009.

The index climbed to a medium term peak in October 2009, as home buyers stepped up purchases to take advantage of the federal tax credit for first-time buyers before its initial expiration date. Since then, however, despite an extension of the tax credit deadline to April, home sales have remained muted, and an increasing number of foreclosures have depressed average prices. Momentum in home prices (3 month rolling, saar), which had increased to 15.7% in September, has fallen into negative territory once more with a reading of -1.5% for January. This could suggest some additional months of falling home prices ahead.

U.S. consumer confidence bounces back. Confidence among U.S. consumers bounced back in March from a 10-month low in February according to the Conference Board’s index, which increased to 52.5 in March from a 10-month low 46.4 in February. The measure of consumers’ present conditions increased from 21.7 in February to 26 in March, the best since last May, while even more encouragingly so, the expectations index rose to 70.2 from 62.9 over the same period, as consumers became more optimistic about the economic recovery and the prospect of future employment opportunities.

Japanese industrial production falls in February. Japan’s 11-month streak of continued increases in industrial production ended in February when output at factories fell 0.9% (m/m) compared to a 2.6% gain recorded in January. In part the February setback is a reaction to January’s unexpectedly strong gains, but a larger contributing factor may have been a temporary slowdown in exports to China, where the Chinese Lunar New Year was celebrated in February. In annual terms, industrial output was a robust 31% (y/y) higher than output in February 2009, while growth in momentum terms remained well positioned in positive territory with 21.3% over the 3 months to February. The Ministry of Trade, Economy and Industry noted today that the reduction in monthly industrial output is a temporary setback, and businesses are expected to increase production in March.

Japanese indicators mixed; but equities retake 2008 highs. With the falloff in Japan’s industrial production in March (following February’s massive gain, this event is not too unusual) and a 0.5% decline in household spending reported for February (m/m)—the first such drop in seven months—one may have thought that Japanese expectations for recovery would have dampened somewhat. But with unemployment holding steady at 4.9% in March (lowest since one year ago), the ratio of job openings to applicants ticking up to 0.47 from 0.46, and cash wages showing some improvement, at decline of 5.5% from year-earlier levels in March (from -6.3% in the month preceding), markets made the best out of circumstances.

Japan’s two benchmark market indexes, the Nikkei-225 and the TOPIX both jumped to highest closes since the beginning of the financial crisis in October 2008. The Nikkei increased 1% to 11,097 and the broader TOPIX picked-up 1.4% to 979.58, with more-than 6 times as many stocks advancing as declining. “The fog has started to clear, as the macroeconomic environment improves globally,” notes Hisashi Iwama of Diam Co. “Confidence in a V-shaped recovery in corporate earnings is getting stronger.”


Among emerging markets:

In Central and Eastern Europe, Hungary and Romania reduced their key interest rates to 5.5% and 6.5% from 5.75% and 7% respectively, bringing benchmark rates to record lows to boost economic recovery. Slovakia’s industrial confidence advanced to a reading of 4.0 in March from minus 5.3 in February, according to the Statistics Office, the highest level in almost two years, on improved expectations about demand over the next three months. Meanwhile consumer confidence improved to minus 17.8 in March from minus 20 the previous month, as households are more optimistic about their financial position and the economic outlook. The central bank projects economic growth this year at 3.1%.

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