Treasury prices have extended gains on Monday as investors look at the bigger picture outlook for the global economy in light of escalating fatalities in Japan and the possibility of meltdown following explosions at nuclear plants. Yield curves are steepening as buyers head for the short-end, driving prices sharply higher at two-and five-year maturities. Dealers now expect that central banks will be slower to restrict policy following a bout of economic recovery at a time when disaster is likely to simmer Asian economies and weigh on risk appetite worldwide. Equity prices have worsened throughout the morning as foreign investors withdraw funds from riskier overseas markets.
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Eurodollar futures – There is a compelling trade-off between S&P equity futures and the 10-year treasury future with an acceleration of gains for notes as equity futures retest Friday’s immediate response lows to the earthquake in Japan. The yield on benchmark government debt continues to plunge and is six basis points lower at 3.35% as dealers park cash in the safety of government securities while investors ditch equities opting instead for shorter yields. The two-year note rose sending its yield down by seven basis points to 0.57%, while implied yields on Eurodollar futures sank by 11 basis points along the strip.
European bond markets – German bunds have reversed earlier losses incurred following a strong reading for industrial output while progress appeared to be made on finding a lasting solution for the sovereign debt crisis. The EU agreed to reduce the cost of borrowing to Greece as it attempts to adhere to budget-deficit cutting plans while it refused to afford the same privilege to Ireland whose new Prime Minister refused to raise the nation’s 12.5% corporate tax rate. The June bund future responded to the positive weekend discussions by falling to a session low at 121.70 before stocks extended losses propelling global long-ends higher. The contract rose back toward breakeven for the session having been 66 ticks in negative territory for the day and is currently trading at 122.32. The headway made by lawmakers over the weekend allowed for a slide in yields on peripheral government bonds with Greek 10-year yields lower by 36 basis points and a 15-pip slide in the cost of Spanish borrowing.
British gilts – Implied yields on short sterling interest rate futures fell for a third straight session with a decline of around five basis points along the yield curve. Rate expectations continued to soften as fallout from Japan takes hold. The June 10-year gilt future rose by 42 to 117.76 sending the cost of government borrowing down by four basis points to 3.59%. Governor King, speaking in California over the weekend, warned of imbalances created by worsening tensions between deficit and surplus nations.
Japanese bonds – June JGB futures surged for a second day following the Bank of Japan’s massive cash injection to the domestic money markets following its regular monthly meeting. The central bank, in an attempt to preempt filing business and household confidence from manifesting into an all-out rout in the financial markets, said it would buy ¥500 billion in government bonds, ¥1 trillion in short-dated bonds and ¥1.5 trillion in corporate debt. The June contract surged by 85 ticks to 140.05 and sent the 10-year yield lower by seven basis points. The five-year bond surged by the most in two years also sending the yield down by seven pips as investors respond in the aftermath of the nation’s worst natural disaster.
Canadian bills – Bill prices underperformed Eurodollar futures on Monday but implied yields slid by eight basis points along the curve. Government bonds also made strong gains with the June futures contract higher by 36 ticks at 120.96. A report showing the level of usage across domestic companies during the fourth quarter disappointed somewhat. Capacity utilization was revised down for the previous quarter leaving the latest reading of 76.2% barely above the prior reading.
Australian bills –Australian credit markets responded to a Pan-Asian breakdown in stock prices led by a 6.2% slump in Tokyo. Dealers slashed forecasts on the outlook for monetary policy as potential ramifications unwound across the media. Only one month ago dealers predicted that over the next 12 months the Reserve Bank would lift its benchmark rate of interest by 36 basis points. Today markets have a mere 17 basis points priced in and given that this is less than the 25 basis points that would result from a further tightening, suggests that dealers are moving towards a wager that further bets are now off. Bill prices jumped by 12 basis points while the yield on the 10-year Aussie government bond slid by four basis points to 5.40%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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