IB Interest Rate Brief: Investors stick with bonds
The damage inflicted upon core government bond prices as a result of the trillion dollar rescue package announced by the European authorities at the weekend appears to have run its course. While U.S. government notes yield a little more than they did by the time markets had chance to respond in early Monday trading, German debt is has regained its poise and has rebounded to those opening levels. The rejection of weaker bond prices and higher yields tells us that fear remains an integral factor despite the impact on peripheral European government bonds where markets have once again found stability.
British gilt –But the winner on the week has to be the British gilt where a confluence of positive factors has lifted prices well above Monday’s opening gambit. A trade report released today shows buoyancy in demand for British goods and services while a sharp jump in imports reflects a better attitude amongst consumers. A separate report today confirmed incrementally better confidence, while a midweek employment scorecard showed a rude pace of job growth.
The formation of a collation majority government has soothed the markets worst fears that political gridlock might hinder progress towards a workable budget deficit reduction plan. But it was this week’s inflation report that has proved the biggest boost to gilt prices. The market is coming around to the Bank of England’s veiled warning that a rise in interest rates may yet be some way off. And a welcome from Governor King for the coalition’s predicted £6 billion in spending to be announced before July is a precursor to a further tightening in fiscal policy. The overall tone improves the look of British debt across the yield curve.
As such short sterling futures once again jumped, this time for a gain of seven basis points at deferred maturities, while two and 10-year gilt yields declined by seven and two pips respectively today.
Eurodollar futures – Initial claims data this morning could have been better but still appears to show only a sliver of growth. The 444,000 new claims is still stuck north of the 400,000 watershed that would see sustained growth resume in the U.S. economy. Eurodollar futures soured a couple of ticks, but this is likely unrelated to today’s report, which also saw an increase in the number of continuing claims. Eurodollar futures eased by three pips earlier in the session before turning positive, while the June treasury note futures rose to 118-18 for a three-tick gain on the day. The yield stands at 3.56%.
Canadian bills –Canadian bonds are matching mid-morning gains for U.S. treasury prices with a 26-tick gain for the June future lifting the contract to 118.83. Short-dated bills are a tick better.
European bond markets – Pressure on the euro continues to be a driving force behind June German bund futures, which late in the day are rising towards the day’s high. Euribor prices are a couple of ticks better off.
Australian bills – Government bonds slumped amid more positive employment news from down under. Not only was the March report revised higher, but the April report saw a bigger gain for jobs at 33,000. During the last two months employers have added 60,000 positions. Rate expectations turned bearish again on the news with 90-day bills declining by seven pips along the strip while bonds added 6 pips to 5.52% on the news.
Japanese bonds – Weak loan growth data from Japan maintained a bid for June JGB futures, where yields eased a couple of basis points to 1.296%.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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