Yields are lower as investors weigh up the likelihood of a slowdown in consumption in response to rising crude oil prices. The national average price of gasoline in the United States of $3.52 per gallon easily has the capability of acting like a consumption tax crimping disposable income. Earlier hopes for a speedy end to the Libyan civil war that sent crude oil prices lower have yet to materialize and there are few signs of a meaningful dip in energy prices along the horizon. The trend around the world towards rising yields has therefore hit a speed-bump and once again government paper prices are pointing to lower yields, although it isn’t a smooth ride.
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European bond markets – Following a few phone calls by the European Central Bank to major market counterparties on Wednesday yields on peripheral debt prices reversed course. An earlier rise to a record yield for benchmark Portuguese government debt weighed on other high-yielding neighbors, but those phone calls caused sufficient suspicion among dealers who tightened up pricing not wanting to get caught short of peripheral debt. Once again, the sovereign debt crisis is resurfacing as debt-laden nations attempt to auction bonds to plug deficits in a rising interest rate background. That’s an uncomfortable mix and one that has investors preferring to sit on their hands awaiting formulation of a sustainable plan to rescue less healthy nations. German bund yields slipped by three basis points as the June futures contract rose by 11 ticks to 121.61.
Eurodollar futures – June treasury futures rose as stock index futures reversed a healthy start. Investors are awaiting a Friday report in hopes of an eighth straight monthly gain in retail sales, but the outlook is far less certain given the challenge of stubbornly escalating crude oil prices. The contract traded up to 118-21 at its best sending the yield down three ticks to 3.52%. Eurodollar futures are making positive headway as equity prices decline with implied yields also falling by three basis points.
Canadian bills – Following the lead set by treasury prices Canadian bonds are also firmer with the June future adding 10 pips to 119.53. Shorter-dated bill futures were unfazed by a report showing a 0.2% monthly increase in new home prices leaving the annual pace of change higher by 1.9%. Implied yields remain toward their low point for the session with the strip easing by two pips.
British gilts – Short sterling futures are apprehensive on the day ahead of an interest rate decision by the Bank of England. Although no change is expected so shortly after a tame quarterly inflation report, investors are nervous given the fact that it really wouldn’t take a big swing in sentiment among the nine-member voting panel at the MPC. At the February meeting three members argued for monetary tightening, hence the firmer tone to implied yields today. Also released was a BRC report showing that stores are passing on a government sales tax increase causing an increase in the annual pace of store price inflation to 2.7%. June gilt futures rose to 116.30 sending the yield lower by two basis points to 3.66%.
Japanese bonds – Bond yields were unchanged at the 10-year horizon although the June JGB futures contract slipped by 11 ticks to 138.58. Reduced demand for bonds was apparent as stock prices rose while a report showed an increase in machine orders, which rose at a 5.9% annual pace.
Australian bills – Bond yields eased by one pip to 5.55% while 90-day bill prices were lower at the front and higher at the back as the yield curve flattened out further. There was a little softening in rate expectations following comments from Deputy Governor Lowe at the Reserve Bank who described softer consumer activity. He also noted that structural economic shifts around the region were making it harder to read the inflationary tealeaves in light of a stronger Aussie dollar. Rebounding mining activity served to increase costs while the currency was restraining prices elsewhere laying sown challenges for the central bank.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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