Retail report spurs treasury gains

Bonds are mixed today with European fixed income prices falling as investors appear to be less willing to buy into government auctions without the lure of higher yields. Meanwhile U.S. markets are responding to a mixed retail sales report just as investors attempt to reconcile signs of weakness with the best quarterly performance by technology bellwether indicator Intel Corp.

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European bond markets – The Prime Minister of Spain is busy selling his nation on the virility of its banking system in a national parliamentary address. His prediction is that the forthcoming stress tests will prove its health. In the meantime financial institutions have steered clear of the bond issuance market for fear of failure leaving banks to borrow directly from the ECB. According to a report from the Bank of Spain domestic banks borrowed €126.3 billion from the ECB throughout June, which is a 48% increase over May. For the euro-area as a whole borrowing was 4% lower throughout June.

German bunds have traded in a relatively narrow range in a day devoid of driving news stories. Eurozone industrial production data for May fell short of expectations and rose 0.9% for a 9.4% annual pace of increase. Nevertheless yields on government debt have edged higher after tepid demand at auctions. The September bund future rose to 129.06 where yields are flat at 2.64%.

Eurodollar futures –September treasury-note futures were slow to react to the June advanced retail sales report. Interpreting this data is tricky and is perhaps less bearish than at first blush. The June report shows a weaker than forecast reading with sales slumping 0.5%. However, the May report was revised up by one-tenth leaving the back-to-back performance less negative. But stripping out the decline in gas sales, which is possibly explained by lower gasoline prices, and excluding auto-sales, which fell 2.3%, monthly sales rose by 0.1%. Overall performance among retailers was mixed with gains for vendors of electronic appliances, clothes, general merchandise, restaurants and bars.

It took about 45 minutes for bonds to fully respond with 10-year note futures rallying from around 121-20 ahead of the data to an intraday peak at 122-06. Yields have fallen by around four basis points to 3.08%. Gains for Eurodollar futures following the muted report stand at around seven basis points. Investors are also waiting for Wednesday’s FOMC minutes from the June meeting for evidence that any Fed members might have voiced concern over the health of the economic recovery.

British gilts – Gilt futures remain lower in light of the jump in treasuries after a government report confirmed the health of the British labor market. June jobs growth jumped marginally above 20,000 dragging the rate of unemployment to 4.5%. The report helps overcome recent fears that perhaps the pace of growth has slowed. September gilts fell 12 ticks to 120.81 where the yield stands at 3.39%. Short sterling futures reflecting expectations in the cash market fell marginally in sympathy.

Japanese bonds – September JGBs couldn’t maintain a rally during a surge in the Nikkei Dow 225 index. Yields rose by one pip to 1.129%.

Australian bills – Surging consumer confidence and an explosion for second-quarter growth in Singapore reminded investors that the Asian recovery continues. Whether or not this might lead the Reserve Bank to boost monetary policy further remains to be seen, buy investors sent implied Aussie yields higher at the short end on Wednesday. Bill prices slid upwards of eight basis points as the Westpac consumer confidence index powered ahead reminding investors that the domestic economy continues to forge ahead. Government bond prices slumped sending the 10-year yield six basis points higher to stand at 5.16%.

Canadian bills – Spreads continue to widen against core U.S. treasury prices. The retail sales report helped couch Canadian bonds but the one basis point decline in yields lags the treasury performance with the spread opening up to 17 basis points. Investors widely expect the Bank of Canada to lift policy next week.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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