Despite a strong reading from the ADP employment report on Wednesday there are a couple of dampeners to cause a bid to fixed income prices. Earlier enthusiasm for a lasting solution to the Eurozone sovereign debt crisis took a ding following comments from a German official while a reminder of the lingering crisis came in the form of an Irish downgrade. The one-sided Egyptian political crisis took a peculiar turn in light of President Mubarak’s announcement that he wouldn’t seek reelection in September when thousands of his supporters clashed with opponents in Cairo. Scenes of running battles reminded investors of risks to peace and therefore the secure flow of trade via the Suez Canal. Bonds spiked as attention was drawn to the pitch battles on the Cairo streets.
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Eurodollar futures – There is little to drive treasury prices midweek and after Tuesday’s rise in yields, bond buyers have emerged to keep prices in check. An ADP report says that US employers added 187,000 jobs in January and is a second strong showing from the private payroll provider. Treasury futures saw gains accelerate shortly after the report sending the March contract to as high as 120-22. The December reading was revised lower by 50,000 jobs to 247,000. Last month’s first estimate spurred hopes of a strengthening labor market. The yield fell to 3.40%. Eurodollar prices were mixed and either side of unchanged along the strip. The ADP report still projects a far bigger gain than most economists predict for Friday where they expect 136,000 additional jobs were created in January.
Canadian bills – Canadian government bonds rose following the ADP report keeping a 10 basis point spread beneath the benchmark U.S. Treasury note. Yields fell as the March bond future rose to 120.99 sending the yield down to 3.30%. Bill futures moved a tad lower sending yields in the opposite direction ahead of Friday’s domestic employment report.
British gilts – The short sterling strip took a further pounding following a second purchasing managers’ report offering the view that a fourth quarter growth contraction won’t be repeated in the first quarter of 2011. The year-end contract has consequently moved lower in price by 33 basis points from high to low in the space of less than a week as implied yields have risen to 1.70%. The yield strip is higher by about five basis points today as short rate futures slip again. The culprit was a return from contraction to expansion in the construction sector. Dealers had anticipated a mild improvement but for the sector to remain on the defensive. The credit market has seen an abrupt shift in expectations in the space of a week with the chance of a 25 basis point rise at the May meeting jumping from 40% to 70% in the space of one week. March gilts weakened earlier to a session low at 116.67 before staging a recovery to 116.94 to yield 3.695%.
European bond markets – S&P ratings served up a down grade for Ireland on Wednesday indicating that uncertainty over the rising cost of recapitalizing its financial affairs was a heavyweight. It will revisit the scenario facing Dublin in April and may remove its negative watch on the nation. Bond markets were stable with peripheral bonds continuing to outperform as yields fell. However, storm clouds appear to be gathering on the horizon although at this point it’s hard to know what’s behind them. The WSJ carries an article warning that the recent euphoria towards highly indebted governments is likely to hit a brick wall. Also an earlier comment attributed to a German official says that the government doesn’t back the purchase of distressed government bonds by using the European Financial Stability Fund. Much of the acceleration in risk appetite has been based on hopes that a lasting agreement is in the works for European sovereign debt problems. March German bund prices rose sending the yield lower by a couple of basis points to 3.22%.
Japanese bonds – The rebound in global stocks dampened demand for the safety of Japanese government paper. Follow-through buying across Asian and Pacific markets on optimism over the global recovery deterred bond buying. A stronger yen weighed on bond prices, too, with the March JGB contract losing two pips to yield 1.23%.
Australian bills – A more upbeat RBA earlier in the week and a recovery in stock and commodity prices kept downwards pressure on bill prices. The strip closed the day with losses of just a couple of basis points while bond prices joined in a global rally sending yields down five basis points to 5.53%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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