Morning Fixed Income Primer

In fixed income-related equity news overnight, UPS (UPS) cut its first-quarter guidance following the close in the US, citing weaker volume trends, increased fuel costs, and a weakening US economy. UPS’ lower guidance does not come as a total surprise considering the poor guidance issued by FedEx (FDX) when it announced third-quarter earnings back on March 20^th.

Elsewhere, according to the Times, Dow component Boeing (BA) is expected to announce that its 787 Dreamliner has been delayed by 18 months. Delays are expected to cost the company billions of Dollars as was the case when Airbus delayed the A380 in 2006. The Financial Times ran an article saying that Citigroup (C) is closing in on a deal to sell $12B in leveraged loans at a discount to a group of leading private equity firms including the Blackstone Group (BX), TPG, and Apollo Group (APOL). According to the article, the loans are expected to be sold at an average price of slightly below $0.90 on the Dollar. In Germany, although not tradable, it is worth mentioning that the relatively small German bank known as Weserbank has been order to stop trading by the German watchdog after becoming over-indebted. The bank had total assets of approximately €120M at the end of 2007.

In other news, according to the Telegraph, the IMF is expected to cut its 2008 UK growth forecast to 1.6%. The Telegraph also asserted that the IMF is likely to forecast that the UK is headed for the slowest two-year period of growth since the last recession in the early 90s. According to German newspaper Die Zeit, initial Q1 GDP growth forecasts for Germany are 0.6%-0.7%. Regarding the looming G7 meeting set to commence on Friday, the WSJ speculates that G7 is seen supporting a plan calling for financial market transparency. Following the trend, the WSJ did not mention currencies as the normal G7 mandate about the undesirability of currency volatility is thought likely to be reissued. In the US, the WSJ wrote that the White House is expected to back an expanded effort to aid homeowners, which would extend government insurance to riskier loans. S&P cut its ratings on US mortgage insurers MGIC Investment (MTG), Old Republic International (ORI), PMI Group (PMI), and Radian Group (RDN); all four insurers remain within S&P’s medium-grade tier.

Asia

In Asia, following a lower close in the US, the major Asian indices booked losses today, with the Shanghai Composite –5.50%, the Shenzhen Composite –3.48%, the Nikkei 225 –1.05%, and the Hang Seng –1.13%. JGBs yields were on the rise early on in the session after Parliament officially appointed Masaaki Shirakawa to head the Bank of Japan. While a solid profile has not been drawn, and the familiar descriptive terms have not yet been nailed down, Shirakawa is thought to be more dovish than hawkish, seeming to push a rate cut out of the picture in 2008. In his first comments as BOJ governor Shirakawa indicated that he has no preconception over monetary policy, and added that the Japanese economy is slowing, but not collapsing. The JGBs were relatively unaffected by the BOJ’s decision to keep interest rates unchanged at 0.5%. As expected, the decision was unanimous for the fifth consecutive month. JGBs yields did however respond the BOJ’s monthly report, posting a sharp decline after the BOJ cut its view on the core economy for the first time since December of 2007. The BOJ dropped from its statement the phrase “moderate expansion trend,” substituting in the view that the economy is expected to grow at a slower pace for the time being, and will eventually follow a moderate growth path. JGBs have since been rather choppy, moving between positive and negative territory. Elsewhere in Asia overnight the Thai central bank left interest rates unchanged at 3.25% as expected, and said that inflation is peaked and is seen moderating in the second-half. Finally, on the political front, according to initial projections the South Korean conservative party has won parliament.

Looking ahead, focus tomorrow will fall upon a few separate economic releases. South Korea is due out with its interest rate decision; The South Korean bank is expected to hold rates at 5.00%. Australian unemployment data for the month of March could create a slight buzz, however Japanese machine tool orders and current account data for February are likely to steal the show.

Europe

In Europe, the German trade balance unexpectedly widened in February seeming to indicate that record Euro levels have not impacted activity in the German marketplace, however some analysts have argued that volatility in the economic data has not yet allowed the impact of Euro strength and the financial market turmoil to show itself. Government bonds opened higher in the session, and posted further gains after the equity markets opened lower. Long gilt futures in the UK took a slight hit following stronger than expected industrial and manufacturing production data for the month of February, and continued to follow a downward trend thereafter, but have been able to maintain their position in positive territory. As expected, there were no revisions to the final fourth-quarter GDP readings in the Euro-Zone overnight, which came in at 0.4% Q/Q, and 2.2% Y/Y. Two and ten-year European government bond spreads have widened against Germany overnight. Overall the European yield curves are relatively flat, but have a steepening bias. Swap spreads have risen from closing levels seen yesterday, while interest rate futures seem are pricing in greater expectations of lower rates along their respective curves. There was no new supply in the Euro-Zone or the UK overnight, however source reports indicated that Italy will sell its new 15-year bond at +16bps vs. the 3.75% August 2021 BTP.

Looking ahead, with little activity scheduled in the US today focus for the European government bonds and fixed income futures alike will rest upon the ECB, BOE, and to a much lesser degree Sedlabanki interest rate decisions scheduled tomorrow. Most expect that the ECB will do more of the same… namely the ECB is expected to hold rates, while the ECB’s Trichet will reiterate once again the ECB’s price stability mantra. The BOE decision could be interesting. While the general consensus is for a 25bps rate cut, there have been calls for a 50bps rate cut, especially in the wake of yesterday’s Halifax house prices, which posted their biggest slide in 16 years. There are few opinions about what the Sedlabanki will do, however there are many possibilities. Recall that the Sedlabanki raised rates by one whole point in an inter-meeting move near the end of March. Between the unscheduled rate hike, which was aimed at high inflation, and now we’ve seen Icelandic CPI at a 6-year high. The question for tomorrow is, hold, +25bps, +50bps, +75bps, or +100bps? All remain possibilities.

US

Treasury yields have declined overnight following the FOMC minutes, which said that a severe economic downturn was possible, and described recent inflation data as disappointing. May fed fund futures are currently pricing in a 40% chance of a 50bps rate cut a the next policy-setting meeting. Looking ahead, there is only one economic number scheduled in today’s session, February wholesale inventories. In central bank speak the Fed’s Kroszner is due to testify on housing legislation, the Fed’s Bernanke is scheduled to speak on financial literacy, and the Fed’s Krozner is due to speak about the US economy. Additionally, the Treasury’s McCormick is scheduled to hold a pre-G7 briefing. Notable earnings scheduled for release in the US today include Circuit City (CC), Progressive Corp. (PGR), Shaw Group (SGR), and Bed Bath & Beyond (BBBY).

At the Moment

Moving in on the halfway point of the European trading session, as of 5:15 EST, the Euro-schatz is +16 ticks at 104.310, the Euro-bobl is +32 ticks at 109.82, and the Euro-bund is +18 ticks at 110.06. Over in the UK long-gilt futures are +4 ticks at 110.07. A few hours of the US bond market open 10-year note futures are currently +8 ½ ticks at 117-23. The spread between the 10-year bund and 10-year note stands at 48bps, while the spread between the 10-year gilt and 10-year note stands at 97bps.