There is a certain amount of role reversal apparent in government bond markets at the end of a week in which investors jumped into core Eurozone bonds and out of those issued by Uncle Sam. Following a rise in the U.S. employment rate in a Washington report released Friday, investors have rushed headlong back into U.S. debt sending yields lower. Meanwhile, core Eurozone debt prices are lower as confidence appears to be on the mend following constructive ministerial comments, which have also painted a rosier picture for peripheral government bonds.
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Eurodollar futures – Traders were clearly harmed by today’s price action judging by the chart of the March 10-year note future. Data all week has weakened investors’ appetite for fixed income and created the impression that the economy was healing nicely. Moments ahead of Friday’s report, the contract slid to an early session low at 122-02 with traders selling into the report finding efforts to fast-cover losing positions were being swamped by value players looking to lock into yield. The March contract jumped to a session high at 123-14, but has recently pared gains as investors figure that the healing process is moving in the right direction anyway. The 10-year yield dropped by six basis points to 2.928%. Eurodollars recouped 12 basis points of recent losses as buyers swooped.
European bond markets – Evidence of domestic central bank buying of ailing peripheral government bonds helped revive the fortunes of Ireland and Portugal at the end of the week. The 10-year yield on the former slumped 40 basis points while Portuguese yields slid by 15 basis points. Meanwhile President Trichet continued to talk down the prospect of a crisis in the Eurozone and was joined by the German Finance Minister who told the French journal Les Echos that the reality of the situation didn’t match the embedded fear. Core government debt prices therefore declined causing yields to rise and allow for a further compression of premium for peripherals. March bunds in Germany fell 42 basis points to 125.76.
British gilts – There was little to drive British debt prices on Friday other than to respond to cross border flows in sentiment. After several days of losses, gilt futures expiring in March rebounded from a session low at 188.81 and are currently higher following U.S. jobs data at 119.39. The yield on 10-year government paper stands at 3.38%.
Japanese bonds – Japanese bonds stood still overnight in anticipation of a firming employment situation in the U.S. March JGB futures ended with a mild three tick loss at 140.09 with yields ending the week at 1.20%.
Australian bills – Despite an unexpected contraction in service sector activity for November, Australian government bond yields rose three basis points to 5.458% following on from Thursday’s weakness in global markets. The AiG services PMI fell to the sub-50 contraction zone with a reading of 46.2. Aussie bill futures retained a negative bias closing down with losses of four points on the session.
Canadian bills – Canadian short-dated bills of acceptance rose by seven points following a domestic employment scorecard that disappointed some investors. The overall gain in employment was 15,200 jobs although gains were predominantly driven by temporary positions. Like treasury futures, Canadian government bonds are higher with the contract up by 34 ticks at 121.65. Implied yields on bill futures are also lower by six basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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