Pressure on the single European currency returned following a poorly attended auction of Italian government bonds. The news followed a well received and glowing report of robust Eurozone growth in the second quarter, but the gloss was lost and upwards pressure returned to core German debt prices. North American bond markets ground to a tired halt at the end of a relentless rally that spurred global bond yields to record lows throughout the week.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis.
Eurodollar futures –Eurodollar traders were non-plussed by a 0.4% gain for U.S. retail sales in July. The 90-day contracts showed little inclination to budge in either direction after a day of profit-taking on Thursday. The September 10-year note future continued to make gains to 125-19 at best helping shave a couple of pips off the yield to 2.717%.
Canadian bills – A strong reading of auto-sales across Canada through June served to remind money traders that despite a potentially weaker external environment, the domestic consumer is living it large. Three-month bill futures declined by four basis points sending implied yields firmer while the Canadian government bond future stayed in the black with the September contract adding just four pips to yield 2.995%.
Japanese bonds – Concerns remain that a slowing external situation might prove harmful to the already not-too-hot-and-not-too-cold domestic economy boosted demand for government bonds to end the week. September bond future buyers added 23 ticks to help drive yields down by two basis points to 0.97%. Concerns over the raging strength of the Japanese yen seem to be going nowhere with Bank of Japan officials showing few signs of immediate action. The downside risks that currency appreciation adds to the economic outlook is yet another draw to the safety of government bonds.
European bond markets – Second quarter GDP across the Eurozone was extremely healthy at 1.0% over the first period and was driven by the strongest period for German output since 1991 when the east and west were unified. German growth surged 2.2% between quarters while France and Spain also contributed to the expansion that helped breathe life back into an ailing single currency that too many traders were quick to write off. However, the news today was dominated by the present as traders chose to cast a light on the slippage in demand for Italian government bonds. While all five and 15-year bonds were successfully sold, a decline in the bid-to-cover ratio was a wake-up call to the euro bears who are convinced that ailing health will come back to slurry the euro’s recent revival. The September German bund contract moved once more to a record high as investors reached for the ultra-safety of core government paper. The September contract reached 131.44 at its best.
British gilts –September gilt prices ranged sideways-to-down while the yield rose by one basis point to 3.122%. Short sterling prices lost some of their recent upwards momentum and a two pip decline today is possibly nothing more than profit taking in a week that saw record highs across the yield curve.
Australian bills – Aussie bond buyers failed to drive yields beneath a 5% handle to end the week as mild selling drove the 10-year yield to 5.034%. There was more of a positive attitude towards risk during the Pacific session with Asian equity prices snapping several negative sessions and as politicians clamored for the Bank of Japan to arrest the appreciation of the yen. The rise in the Aussie dollar encouraged by growing risk appetite left money traders with little reason to push yields lower.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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.
