Bond prices around the world are sending yields lower as investors had a laundry list of worries to choose from. Chief among them of course was a devastating earthquake that hit Japan likely to leave lasting structural damage and a sizeable rebuilding tab for the already debt-burdened government. Investors elsewhere remained nervous over the formation of plans to solve the European debt crisis as costs of government borrowing soar for debt-laden victims.
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Eurodollar futures – Investors barely responded to the February retail sales report released Friday that in the event showed an in-line 1% February gain for sales. The report also boosted January data to almost twice its earlier pace. But faced with triple-digit oil prices and growing uncertainty, there remain questions over the future health of the economy. A Michigan University confidence report raised suspicions that the best of the recovery is only available in the rear-view mirror and that the Fed’s reticence to fully embrace recovery might have been a wise choice. The March confidence index was predicted to dip by a point from the February reading of 77.5 but in the event slid to 68.2 for quite a powerful reversal. Note futures remain marginally higher although the rally that saw yields slip to as low as 3.32% this week is faltering as stocks are staging a recovery. Eurodollar futures have made modest gains on diminishing threats to any change in Fed policy.
European bond markets – The timing of the Japanese quake meant that trading in European debt was consumed by external factors even as European officials started to discuss plans to resolve the debt crisis. June German bund prices rose while several peripheral nations saw bond yields rise today as fears surrounding default grew. Portuguese five-year yields rose to a record. A measure of consumer prices for Germany rose in February to 2.2% over the year for its strongest reading since October 2008. However, much of the fear over the onset of a monetary tightening cycle has been built into bunds lately and the contract is now responding to rising fears over slowdown engineered by soaring energy costs. The overall catalysts today remained the earthquake disaster and buoyed June bunds to 122.33.
Canadian bills – Implied three-month cash rates for year-end have eased by 15 basis points since midweek following Friday’s employment data for February. Investors were underwhelmed by a net gain of 15,100 employees during the month but more concerned by the loss of 23,800 full-time workers. Following Thursday’s revelation that exports swooned at the start of the year dealers have started to flatten the curve by lowering expectations for a series of embedded rate increase this year from the Bank of Canada. The yield on benchmark government debt fell by one basis point to 3.25% leaving the premium paid by U.S. investors at 12 basis points. Bill prices made gains of five basis points.
British gilts – Short sterling interest rate futures made healthy gains of eight basis points in light of a report showing rising cost pressures faced by producers were easing. Monthly output costs passed on by producers rose by 0.5% on the month compared to a 1.1% increase last month. The 10-year gilt yield slid by a further five basis points to 3.55% as buyers lifted the June futures contract to 117.31 for a two-week high.
Japanese bonds – June JBB futures surged in the immediate aftermath of the disruption created by the 8.9-magnitude earthquake. Stocks sank by 1.7% and investors dove for cover buying government debt. Ahead of course lays a recovery program that will require more issuance than the government can stomach, although the nation will ultimately accept. On Friday the benchmark 10-year yield slipped by two basis points to 1.25%.
Australian bills – The effect of the disaster impacting Japan was also felt in Australia where dealers bought domestic governments bonds as the region’s stock prices suffered. The 10-year yield shed a further four basis points to close at 5.44%. Bill prices also gained by four basis points in response and despite several strong pieces of Chinese data indicating that monetary efforts to rein in demand have so far fallen short.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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