The weight of fresh supply in government bond markets is a factor facing fixed income investors this week giving little cause to drive yields lower. Most yields are ever-so slightly higher as a weaker dollar gives off an air of marginally firmer risk appetite, again weighing on the need for the safety of fixed income.
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European bond markets – German consumer prices remained static and very well behaved during October. The price of German bunds remains on an upward path given the tensions resurfacing in the peripheral economies. Investors are treading on eggshells waiting to hear how the Irish government’s plan might be successfully administered in light of the crippling burden of saving its nation’s banking system. The December bund traded up to 130.72 by mid-morning in New York. The German Finance Minister has been touting a new model for dealing with future financial crises that would burden private bondholders with clearing up messy sovereign defaults. Portuguese and Irish government paper prices fell leaving premiums over German bunds at record levels.
Eurodollar futures – After the jolt in wake of the non-farm payroll data on Friday, U.S. note prices have returned to a smooth sideways rhythm indicating the patient remains in recovery mode. The U.S. markets face a second of three days of further supply with today’s auction of $24 billion worth of 10-year notes up for grabs. Since Friday the December treasury note future has been confined to a 10-tick range keeping yields firmly anchored around 2.54%.
British gilts – The British yield curve steeped marginally with short sterling interest rate futures rising by a small amount and gilts on the decline following a report showing the strongest performance in the manufacturing sector in two years. Yields on government debt rose as the likelihood of an early resumption of the central bank’s bond buying program remained a distant prospect. The December gilt future declined by 13 ticks to 124.01 to yield 3.01%. The housing market still displays a negative beat following a RICS survey showing the most bearish response in 18 months from home surveyors and estate agents involved in the business.
Japanese bonds – Yields rose by two basis points and closer to 1% on Tuesday after a five-year breakeven rate signaled its weakest reading of deflation since February. The Japanese are by now accustomed to price deflation, but today’s report that showed a five-year average pace of decline in consumer prices of 0.86% worked against ultra-low Japanese bond yields. Sellers pushed down the December JGB contract to 142.72 amid signs that China had again been a net seller of Japanese paper during September. Onlookers note that China is perhaps not expecting any further material gain in the value of the yen and given already low yields, investing now at a time when the yen is at such a strong level will only end in tears.
Canadian bills –Canadian bill prices extended losses from Monday’s session as government bond futures declined. The 10-year yield rose to 2.89% as the December contract eased 10 ticks to 125.55. The short end of the curve steepened up as sellers concentrated on the 2012 strip to sell BAX contracts.
Australian bills – Bill prices continued to ease sending implied readings higher by three basis points. At the other end of the yield curve government bonds improved causing the yield to ease one basis point to 5.29%. Dealers remain wary of taking on positions in the bond market before the release of the October jobs report after which yields could respond in either direction. The September report showed increasing health for the domestic economy with the creation of 49,500 new positions as exports supported local production. Last month’s reading is expected to show the creation of a far more conservative 20,000 new positions.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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