Yields pare gains despite GDP setback

Yields slumped after investors reacted with despair to a downturn in U.S. second quarter GDP. The response might not have been so bad had St. Louis Fed chief Bullard not pulled out a paper discussing a contingency plan in the event deflation became a threat. The timing of Mr. Bullard’s paper seems to have had some negative implication for today’s 2.4% reported growth rate despite a conviction that current quarter growth will rebound to 3% and despite the ongoing stream of evidence from companies reporting killer earnings. An earlier triple-digit slide in the Dow industrials index is fast eroding.

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Eurodollar futures – Three month dollar libor in London continued to decline as investors firstly continue to see no sign of a move from the Fed, while second, the liquidity logjam continues its glacial pace of easing. All global short ends are making gains future-wise this morning as implied yields continue to decline. The second quarter GDP report fell short of a projected 2.6% pace of gain. Within the report the consumption reading at 1.6% fell well short of a 2.4% prediction and begs the question of where corporate America is making all its money.

The yield on the two-year note slipped to a record low following the report while that on the 10-year dropped five basis points to 2.93%.

British gilts – Yields in Britain were sharply lower by nine basis points in fact after a lesser watched GfK confidence index slipped to its weakest in 11 months. The September gilt future surged almost a full point to 121.51 lifting the contract to levels of a week ago and eradicating a poor weekly performance in light of a better take on the health for the domestic economy. The pound made a substantial weekly gain as a result given the apparent divergence between strengthening British growth relative to the direction of U.S. growth. Gains for short sterling futures were apparent with the red strip (those maturing in the cycle starting September 2011) seeing implied yields swoon by 10 basis points as the yield curve flattened.

European bond markets – The ongoing thaw in cash markets helped euribor futures make gains of six basis points across the strip as the curve felt a parallel lurch lower at the front end. Data was slow and low in impact today as Eurozone unemployment for June remained at 10%. Dealers didn’t respond negatively to a rise in consumer prices for July to a 1.7% pace from 1.4% in June. September bund prices rose by a half point to stand at 128.51 sending yields lower by four bass points to 2.67%.

Japanese bonds – A sour end to July trading for stocks, which saw the Nikkei 225 index slide by 1.6% was caused by a surge in the value of the yen against the dollar to a 2010 high. Weak industrial production data and a rise in the rate of unemployment to a seven-month high encouraged buyers of Japanese government bonds. The September JGB future rose 23 ticks to close the month at 141.95 where the 10-year yield slipped to 1.054%.

Australian bills – Concerns that the world may slow and worries that China’s PMI reading due out over the weekend may have returned to contraction spooked Australian cash markets where bill prices surged 10 basis points and the 10-year government bond yield fell four basis points to 5.19%.

Canadian bills – The weaker U.S. GDP report dampened enthusiasm from Canadian dealers towards a heartier monetary tightening at the Bank of Canada. The news overshadowed the release of Canada’s own monthly GDP report for May, which also came in short of expectations at a 0.1% pace following a flat reading for April. Bill prices rose by five basis points at nearby maturities although red months gained by twice that amount. The 10-year Canadian government bond rallied in line with falling U.S. yields and is ending the week at 3.12% and just 15 basis points above comparable treasury yields.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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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