Global yields started the week on the decline after a joint-force of officials said they have reached a conclusion with the government of Ireland that it cannot defend its fiscal problems in isolation ahead. Bonds with further-dated maturities rose by the most while shorter durations underperformed allowing the yield curve to flatten. Bond prices remain close to the top of the day’s range after the resignation of a key player in Irish politics holding together an already fragile alliance.
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Eurodollar futures – Two-year government notes dipped as the recent back-up in yields responded to the Irish agreement with the EU, IMF and ECB to an as yet undisclosed loan fund that is tipped to total €100 billion. Meanwhile, 10-year yields dropped four basis points while 30-year maturities shed five pips. The perception amongst traders is that contagion fears have been undermined in the short term and in conjunction with continually improving U.S. data, the short-end can now underperform. Eurodollar futures also made outsized gains at deferred maturities.
European bond markets – News of Irish acceptance to a deal was well received allowing yields on government debt to decline four basis points alongside gains made for core German, French and British debt. The news from the head of Ireland’s Green Party shortly afterwards only affirmed the demand for the safety of fixed income. John Gormley said his party would resign from the government following the talks and this week’s budget aimed at delivering four-years of spending cuts. Green support for the government helped it maintain only the slimmest of majorities and the money must now be on a much closer election. And while the weekend delivered positive news for Ireland – at least before the Green Party’s resignation – focus also shifted to the prospect of who the next sovereign nation in need of a bailout might be. Greek bonds slid sending yields higher by 31 basis points after some European partners withheld a loan installment last week. Portuguese yields added six basis points while Spanish government bond yields added three pips.
British gilts –December Gilt futures rose to force the 10-year yield down by four basis points. Short sterling futures also rose sharply sending implied yields on forward 90-day loans down by as much as six basis points.
Japanese bonds –Japanese government bond prices fell sending yields to a two-month high after a newspaper poll showed public support for Prime Minister Kan’s government fell sharply. The 10-year JGB future expiring in December shed 62 ticks to 141.14 forcing yields up to 1.125%. Appetite for bonds soured as fundamentals for the U.S. economy improved, serving up a fresh appetite for the dollar and taking the pressure off the yen. In light of both events dealers have grown steadily less optimistic on future quantitative easing from the Bank of Japan forcing sellers in debt markets.
Australian bills –Aussie government bond prices also responded instinctively to a deal for Ireland, implying an improved tone for risk taking. The 10-year government bond yield rose four basis points to 5.46% while short-dated paper shed just one basis point.
Canadian bills – Canadian government bond futures rose sharply at the start of the day with the December contract jumping 39 ticks to 123.56. Bill prices on 90-day paper also rose allowing implied yields to decline by three basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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