Investors continue to clamor for yield after Japan’s major stock market average slipped into bear market territory driven by grim prospects for exporters in the face of a rampant yen. Benchmark government bond yields have slumped close to 10 basis points ahead of a report likely to indicate consumers in the United States remain insensitive to ultra-low interest rates and are wary of taking on major purchases.
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Eurodollar futures – It’s official: Markets are in panic mode, increasingly driven by a self-feeding selling frenzy in fear of the unknown. In this case the unknown is the prospect for the world’s largest economy suffering the aftermath of a stimulus-induced high from a near-comatose state. It seems that the extent of the slowdown has even taken the central bank unawares after it spent months earlier in the year discussing how to exit its policy of over-easy monetary policy. All that changed when diffusion data points began to indicate a slackening in the expansion while labor markets remained exceedingly loose.
Today S&P index futures are showing early losses after the Nikkei 225 closed below 9,000 for the first time in 15-months and its new 21.1% decline means a technical bear market. Buyers continue to drive down yields on U.S. fixed income where the 10-year yield notched up a 17-month low at 2.5074% earlier as investors sought to lock into declining yields. As that happens and buyers reach across the time horizon for perceptibly better value, the yield curve continues its flattening process. That was evident again today as the two-to-10-year curve receded to its lowest point in 16-months when it fell to 204 basis points. The move is reflected also in gains for deferred Eurodollar futures contracts where gains of 10-basis points indicate a broad brush indifference to any sort of monetary tightening on the horizon. On days like this investors can’t even identify the horizon. Looking at the March 2011/March 2012 calendar spread for evidence we can see the extent of the recent yield curve compression. In March the distance between the two maturities stood at 148 basis points. Today the spread has narrowed to just 55 basis points as investors binge on the far-dated maturities. Later this morning investors expect evidence of more consumer nervousness in the form of data for existing home sales, which if in line with expectations will slide 13% on the prior month. Data released earlier has not helped lighten the mood. A Chicago Fed national business index unexpectedly rose to zero from -0.70 indicating that national activity rebounded throughout July. Currently the September 10-year future is trading 22-ticks higher close to an intraday high at 126-11 and implies a yield of 2.523%.
Canadian bills – Canadian bills rose across the curve by up to nine basis points after June retail sales growth of 0.1% fell well short of a predicted gain of 0.4%. Core data also missed expectations, falling by 0.5% instead of gaining by 0.1%. Adding insult to injury was a downwards revision to previously provided data for May. September bond futures made a healthy 72-tick gain to 127.02 where the implied yield slipped by five basis points to 2.827%.
Japanese bonds – A successful auction of 20-year Japanese paper sent yields at that maturity to a seven-year low at 1.52%. An increasingly strong yen pressured the outlook for exporters’ earnings creating a dip into bear market territory for the Nikkei 225 index, which also helped underpin demand for bonds. The 10-year yield eased by one basis point to 0.91%.
European bond markets – Joseph Stiglitz, Nobel Prize-winning economist, warned that foolhardy Eurozone governments were doing the wrong thing by engaging in fiscal restraint at this stage of economic recovery. The result will likely be a return to recession according to his views. September bunds surged by 107 ticks to 133.83 as 10-year yields again fell to record lows, this time at 2.189%, for a none basis point tumble on the previous session. Euribor prices also crept higher by two ticks after EU industrial orders for June dipped to a 2.5% monthly gain. An IFO index of German business activity also dipped further weighing on sentiment as European stock markets sank.
British gilts –September gilt futures added 101 ticks to 126.09 sending yields screeching eight pips lower to 2.888% after Bank of England policymaker Martin Weale fingered an increasing likelihood of a double-dip recession for the British economy. Gains for short sterling contracts were accentuated at deferred maturities, which added seven basis points. Elsewhere mortgage lending data fell short of expectations.
Australian bills – Aussie bond prices rose sending yields screeching nine basis points lower as the Japanese yen made across the board gains indicative of rising worries over global growth. Bigger gains were apparent for shorter-dated bill contracts which rose by nearly one-eighth of a percentage point.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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