PIMCO’s Bill Gross turned bearish on U.S. government debt and eliminated treasuries from the world’s largest bond fund ahead of creeping doubts in the health of the recovery. No doubt such bond-dumping by the much-admired PIMCO founder took place before the recent acceleration in crude oil prices, yet the sense of elevated geopolitical risks appears to be a challenge to his view that the Fed is on the verge of exiting its over-easy policy stance. Yields slipped once more on Thursday after signs of slowdown in China spooked global stocks, while selling in the S&P picked up as a recovery in the labor market took a pause.
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Eurodollar futures – The Gross confession follows a run-up in bond yields during February to 3.77% as investors waxed lyrical about the health of the economy. The benchmark yield today fell to the lowest in a week to 3.42% after weekly initial claims rose 26,000 to 397,000 through last weekend. Dealers had hoped for little change following a decent rebound in the past several weeks to below a reading of 400,000 often used as a rule of thumb to depict sustainable growth. June notes rallied to 119-11 although had been higher still in the overnight session after China said that it ran a trade deficit in February for the first time in 11 months and the widest in seven years. The drop in exports in the world’s number two economy was taken as a worrisome sign that growth is slowing faster than thought. Eurodollar futures also made headway as implied yields continued to decline by five basis points.
European bond markets – Moody’s blamed the cost to the Spanish government of shoring up the nation’s banks for a downgrade in its debt rating and said the outlook was negative. The strike comes as Spain has issued one quarter of this year’s planned issuance. European yields have popped higher both in response to the reality of an ECB monetary tightening in April, a rise in inflationary pressures and fears that the zone’s most indebted nations will struggle to repay debt. Yields rose in response to the action although the wind direction changed later as broader risk aversion forced the safe haven nature of government bonds to kick-in. June bunds are off the day’s high but with a 38-tick gain have performed well enough to drive 10-year yields down to 3.25%. At the shorter-end of the curve euribor futures continue to inch higher. The December contract now implies 10 basis points less than at its highest price last week in the aftermath of Trichet’s pre-announcement that it should be “no surprise if ” rates were to rise next month.
Canadian bills – Bond buying and stock-bashing accelerated after Ottawa reported a trade surplus far from where analysts had predicted. As was the case with a Chinese report overnight, export data fell off a cliff leaving swollen imports accounting for a reversal of data that had characterized strong global growth. Dealers primed for a trade surplus of C$2.6 billion to start the year wondered what hit them when the report unveiled a tiny C$100 million surplus. The central bank is reliant on export-led growth to keep the economic expansion alive and will cite tumbling exports as reason to leave its short rate of interest alone at 1%. Bill prices outpaced gains for Eurodollars as dealers pared bets for further monetary tightening while government bond yields eased in line with treasuries falling two basis points to 3.31%.
British gilts – The Bank of England said nothing on Thursday as it left its benchmark rate of interest unchanged at 0.5% and it will be another couple of weeks before we learn whether more members were persuaded to jump ship in sympathy with those members calling for a rate increase. Data for January industrial and manufacturing production continued at a robust pace with both sectors expanding at healthy annual rates. In response to rising risk aversion in Europe and beyond the Bank of England’s unchanged policy announcement buyers stepped up an appetite for gilts sending the June contract 73 ticks higher to 117.00 shaving five basis points off 10-year yields to 3.61%.
Japanese bonds – Bond yields gained one basis point after a five-year auction met with a slightly smaller crowd of buyers. A GDP report confirmed that the Japanese economy shrank at a marginally faster pace in the quarter ending December although fears for a further slowdown were not enflamed since recent data has certainly firmed up. Demand for bonds stuck around as selling of stocks around the region gathered pace.
Australian bills – The dour Chinese trade report provided some relief to Australian yields overnight. However, it was a shock drop in the February employment report that was largely behind a seven basis point slide in the 10-year government yield. By the end of the session the cost of borrowing fell to 5.48% following the net loss of 10,000 jobs last month when the market was looking for news of the creation of an additional 20,000 positions. Short-dated bill prices also rose as expectations for a further tightening in monetary policy from the Reserve Bank took a step back. Implied yields eased by five basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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