French Finance Minister Christine Lagarde threw her political weight behind the views of German Chancellor Merkel today as she backed the view that private bond holders should share in the restructuring process in the event of sovereign default. Peripheral Eurozone government bonds fell once again in the face of the rising cost of trading and insuring against sovereign debt default. Oddly the flight to quality fear bid that earlier drove German bund yields down has disappeared as investors watch the fortunes of the euro turn from optimism over growth to fear over defaults.
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European bond markets – Debt restructuring concerns kept the tombstone well and truly positioned on the chest of European yields on Thursday. Even core German bonds seemed to lose some of the recent safe haven bid with yields reversing an earlier-in-the-day decline to stand just one basis point easier at 2.426%. The December bund contract is 14 ticks lower at 130.06. Spanish growth ground to a halt according to a third quarter GDP report today during which time period the toughest austerity measured in thirty years began to take hold. Yield spreads against German paper continued to reach their widest ever in what’s becoming a daily routine as the cost of insuring against default also increases.
Eurodollar futures – A strengthening dollar and weakening performance of stock markets is taking its toll on both short and long ends of the curve. While 75% of respondents to a Bloomberg survey said they didn’t expect the economy would benefit from the FOMC’s second wave of easing, interest rate markets appear to be arguing to the contrary. It’s hard to see how an economy currently growing at a 2% pace won’t benefit even from a blunderbuss approach by the Fed. Granted, not all of the $900 billion spent on bonds is likely to enter the real economy, but it remains far more doubtful that the measure will create a further slowdown in economic growth as a result. The 2012 Eurodollar strip is facing price losses of eight basis points today as the curve steepens, while the December note future is lower by seven ticks at 126-23 to yield 2.64%. Cash bond markets are closed in observance of Veteran’s Day.
British gilts – After a poor reception to the November inflation report from the Bank of England midweek, gilt futures expiring next month continued to decline, albeit at a slower pace than was seen in peripheral markets. The December contract eased 10 ticks to 122.58 as prospects for a second wave of quantitative easing appeared to dim. Short sterling contracts continued to bleed red ink as emphasis shifted from growth to inflation. The implied yield on the December 2011 contract has now risen since mid-October from just under 1% to 1.31% as dealers grow more concerned that the central bank may even start to take away conventional monetary medicine should growth create further price pressures.
Japanese bonds – The prospects of a worsening in deflationary pressures took a ding overnight sending Japanese 10-year yields back to 1% for the first time in seven weeks. Yesterday’s sharp reversal in the yen allows Japanese exporters to breathe easier and helped boost stocks. A government report showed a surprise 0.2% monthly rise in producer prices leaving prices facing factory owners 0.9% higher than a year ago. That increase is the strongest since December 2008. December JGB futures slipped by 11 ticks to 142.41 as investors pare positions predicated on a weakening of the inflationary profile.
Australian bills – There was some relief felt in the Aussie government bond market following a rise in the rate of unemployment. Despite a greater number of job creation last month, most jobs were part-time while full-time positions actually declined. Inflation expectations also fell for November according to another report showing a fall from 3.8% to 3.1%. Together both reports take some pressure off the central bank at its December meeting. Bill prices edged forward by a basis point while the 10-year bond yield slipped seven basis points to stand at 5.34%.
Canadian bills – Canadian credit markets are closed for Remembrance Day.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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