Bonds, stocks and commodities make for a neat triple-play of gains today as European officials try to downplay the need for a Euro-wide fiscal initiative that would act to retard growth. The fact that only Europe’s naughtiest governments would be ordered to amend fiscal woes has soothed stock markets, which are also bolstered by healthy corporate earnings. The stability in the performance of the euro currency also allows investors to stop focusing on that corner of their quote screens. Commodity prices have rebounded after investors realized the earth would not stop spinning on its axis. Bond yields, however, remain anchored to the floor. It might have been expected that the dissipation of fear on account of the above would see investors ditch bonds quickly, but that is not the case as they seem to prefer a hunker-down mentality, just in case the situation turns.
European bond markets – Conditions in European cash markets remain tight as the recent spillover in fear extended to banks. Rising counterparty risk has been a theme recently on account of worries about the quality of collateral held in banks’ vaults. Euribor futures yield slightly less this morning with futures gaining three basis points as concerns subside. The June German bund future is more than 60 ticks from the earlier intraday low at 126.26 and yields are now lower on the session at 2.84 percent.
Eurodollar futures – Eurodollar futures are trading with marginal gains after mixed data. Producer price data for April was rather muted and therefore has little impact on proceedings. An end to the government’s $8,000 incentive to lure new home buyers impacted a strong annualized pace of new home starts to a 672,000 reading. However, there was accompanying disappointment with a decline in the number of building permits, which is a significantly strong indicator of future activity. June treasury-note futures are higher at 119-23 where the yield is two basis points softer at 3.45 percent.
British gilt –Investors in British gilt markets took profits on a six-day-string of gains as yields fell following the formation of a new coalition government. The excuse today was a jump in consumer prices, which rose to a 3.7 percent pace in the year-to-April. The acceleration in the core rate to a 3.1 percent meant that the Bank of England had to provide an open letter to the government to explain the overshoot and predict a return to within the target range. June gilt futures are now 30 ticks above an intraday low point at 117.54, but remains the Euro-laggard today. The 10-year yield rose three basis points to 3.77 percent, while short sterling futures traders also banked gains on a significant price rally as they priced out monetary tightening anytime soon.
Canadian bills – Canadian bonds have resumed a rally after closing near session lows Monday as equity prices shifted direction. Data today showed that in March Canadians spent more on overseas investments while foreign investors redeemed their holdings in Canadian bonds and other securities. The 10-year CGB future has now rallied 26 ticks on the session to 119.67 keeping the yield one basis point below that of U.S. treasuries.
Australian bills – There was little in the minutes of the RBA meeting to suggest an imminent return to monetary tightening. Aussie bill prices rose after the RBA sounded content with its string of six quarter point interest rate increases since October. It said that rising tensions emanating from wayward European fiscal policies might yet escalate raising risks to global growth. Investors took this message in conjunction with the Bank’s trust that consumers were reacting to previous rate rises to mean that policy is on hold. The yield on the 10-year government bond rose four basis points to 5.49 percent as risks of an Asian contagion seemed to be of lesser concern with equity prices having stopped falling.
Japanese bonds –A rise in consumer sentiment helped depress bond prices and lifted yields of a one week low. The reading of 42 percent in April was an improvement on the March reading of 40.9 percent and the indicator is heading for the 50 percent reading at which the balance of optimists is equal to the number of pessimists. The 10-year yield added two basis points to 1.285 percent.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers ibanalyst@interactivebrokers.com
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