Bonds mixed after record-lows for yields

Treasury market investors appear to be having second thoughts on Monday morning following a seesaw session on Friday that witnessed record lows for U.S. 10-year yields. Having reached 126-08 in the September contract (yield 2.53%) profit-taking and a siren voice offering some sage advice in the form of a 2% interest rate increase from a former IMF economist, has forged a downwards path for the contract to 125-10 this morning. Other global bond markets are little changed as some semblance of optimism returns in the form of rising stock markets around the world.

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Eurodollar futures – After a week in which initial jobless claims climbed back to the half million-marker, yields are steady this morning. Some of the euphoric gains made by treasury futures have disappeared and the formation of a double-top on the chart may yet come back to bite some bulls in search of continuing gains for the contract. In light of the weaker than forecast economic dataset last week, the spread between 10-and-two-year yields collapsed to 206 basis points as investors grew increasingly concerned over the prospects for a double-dip recession. To start the week, equity markets around the world have rallied taking some of the upwards pressure off rising bond prices. Throughout this week the U.S. Treasury will issue a further $109 billion in bonds maturing somewhere along the two-to-30-year horizon. Eurodollar futures are marginally higher as the yield curve continues to flatten. One dark spot in today’s news is the clarion call from a former IMF economist who warns that a regime of low interest rates is sowing the seeds of future bubbles and advises the Fed to raise its short rate by 2% as soon as the European debt crisis appears to have been curtailed. Failure to do so will set off further financial imbalances given the negative stance of current policy.

Canadian bills – Canadian short-term bills edged forward by a basis point while the September 10-year government bond future bucked the global trend and rose, lowering the implied yield to 2.909% and 28 basis points above comparable U.S. paper.

Japanese bonds – Japanese yields rose marginally to 0.93% at the 10-year after bond traders drove prices up and yields down last week in concert with global bond markets. The September 10-year JGB future was unchanged at 142.87. Dealers also sold bonds ahead of anticipated government auctions as they discount the potential for more bond issuance on behalf of the government intended to mirror earlier attempts at stabilizing the economy. Last week’s data showed a slackening in the pace of growth in the quarter through June to 0.4% at an annualized pace. The second quarter grew at a 4.4% pace.

European bond markets – Bund prices in Frankfurt fell 20 ticks to 132.69 after survey data revealed a modest downturn in the pace of manufacturing and service sector expansion. The August data revealed a composite PMI reading of 56.1 for the Eurozone, indicating a 13^th monthly expansion. Meanwhile, similar data for Europe’s largest economy slowed at a faster pace albeit from higher levels. Last week yields tumbled to the lowest on record reaching 2.262%.

British gilts –September gilt futures are lower by just 12 ticks to 124.97 raising the yield two basis points to 2.982%. Earlier in the session, data pointed to still-weak household finances according to a London-based Markit Economics diffusion index. Short sterling prices eased by a basis point along the strip.

Australian bills – Aussie bond prices rose even after political uncertainty mounted as early results indicated the weekend’s elections revealed no-clear winner. The 10-year yield dipped to 4.913% as investors bowed to tail-end pressures from last week’s global binge-buying, rather than consider the potential for a growing premium on Australian assets.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC