Bonds jump on follow-through stock selling

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.

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