Bonds have once again fallen off the fence sending yields on government bonds towards a two-week high. Dealers were quick to find room for indecision following the in-line employment report on Friday that was tossed aside in light of the excitement in the crude oil market, where prices later jumped towards the highest in three years. The one-step forwards and two-steps back progress of daily developments has bond buyers backing off each time the stock market recovers from the trauma of a slip into the gutter.
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Eurodollar futures – With $66 billion worth of notes and bonds on the auction block this week, it’s once again simply business as usual for traders. Sell bonds ahead of the auction and buy fresh supply from the government. Data-wise the major report doesn’t come until Friday when February retail sales look set to rebound from mediocre data inspired by inclement weather. Eurodollars are lower shedding up to four basis points while the June Treasury note future has turned around from a rally in overnight trading. The contract is 10 ticks lower and five ticks off the session low at 118-05. Atlanta Fed President Dennis Lockhart said he’d be cautious about extending the Fed’s generous asset purchase plan after it’s scheduled to expire in June. However, given the new threats to the economy he’d prefer to have the flexibility to keep on buying bonds in light of the fact that the U.S. economy could slow as a result. Yields at the 10-year jumped by six basis points to start the week at 3.55%.
European bond markets – German bund futures expiring in June started the week off in a bad mood lifting yields by four pips to 3.31% and the day continued to worsen. Bunds fell in light of the U.S. labor data on Friday with the prior day’s warning from the ECB to keep an eye out for a monetary tightening still ringing in dealers’ ears. The June contract slumped to a session low at 121.32 earlier but has steadied to show a 27 tick loss at 121.47. Friday’s lowest point at 121.12 is a clear nearby target for bears. Moody’s slashed the credit rating of Greece by several notches saying that the country is at risk of defaulting as the struggle to implement deficit-reducing measures increases. Despite the heavy-feeling at the long-end on Monday short-dated futures managed to rally putting in a three-tick gain even in the face of a rise to a three-and-a-half-year high for Eurozone-wide investor confidence.
Canadian bills – Short-dated bill prices dipped by one pip while the government bond contract expiring in June rebounded from an earlier session low at 119.53. The 10-year yield added three basis points to 3.35%. There was no material economic data to drive sentiment on Monday.
British gilts – Short sterling futures seem to be taking a positive net view of the day’s events. A CBI report shows that the nation’s largest trade body expects the central bank to be painfully slow at raising interest rates and to an extent has blunted the knife somewhat. A second report from a manufacturing body indicated the highest balance of companies likely to raise prices in its eleven-year history. The three-month futures contracts gained in price sending yields a couple of basis points lower. Meanwhile the June gilt future eased in sympathy with weakness in European government bonds with the contract declining by 13 ticks to 116.40 to yield 3.67%.
Japanese bonds –Japanese government debt was better bid in light of weakness in Asian stock markets to begin the week. The escalation of violence in the Middle East and the threat to oil supplies also bolstered demand for government paper. The March JGB future added 35 ticks to send the yield on 10-year paper lower by two basis points to 1.27%. A measure of the health of the domestic economy improved. The January coincident index rose to 106.2 from 103.5 for a better than expected performance. The leading index nevertheless proved worse than hoped and sours the better news from the coincident reading.
Australian bills – Aussie 90-day bill futures made minor gains while moving in the opposite direction to government bond prices. The yield curve flattened by a couple of basis points as the 10-year yield rose by two basis points. An AiG performance of construction activity exhibited less contraction at 44.6 after a 40.2 index reading in January. Activity at a reading of less than 50 indicates contraction while above there indicates expansion. Also out on Monday was the ANZ reading of job advertisements, which continued to increase for a tenth month as employers keep trying to find workers. While the labor market remains tight, the central bank has indicated that policy is now set to mildly restrictive and is therefore unlikely to tighten policy without further signs of a burst in either growth or inflation.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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