Bonds are feeling the benefit of safe haven buying as commodity prices and equities sink. Appeals for calm from Japanese Prime Minister Naoto Kan were accompanied by further measures to add liquidity to domestic money markets aimed at soothing investors’ nerves. At this point little is working to stem the crisis and the only reason investors will stop liquidating risk positions is when the media stops having to report the level of radiation around Fukushima to the North East of Tokyo.
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Eurodollar futures – Short and long ends around the world have surged sending yield curves lower in response to the elevated radiation readings from Japan’s ailing nuclear power plants. Non-stop efforts by nuclear engineers to provide cool liquids to the reactors appears to be working as reported radiation levels decline for now. The FOMC announces its latest monetary policy decision on Tuesday afternoon and while the freshest piece of data depicts the strongest reading for manufacturing activity in the New York area in at least nine months, the report will be lost amid the uncertainty spawned by the natural disaster in Japan. The benchmark yield at one point slid to 3.20% or some 55 basis points below its February peak in direct response to the unfolding Japan nuclear disaster. At that level the yield is the lowest since December 10. The June Treasury note future at one point rose to 121-14 before demand tapered off. At its highest point of the session the contract was higher by a full point-and-a-half. Eurodollar futures are about 10 basis points off session highs but have still made double-digit gains as implied yields reflect the threat to global growth.
Japanese bonds – June JGB futures surged again to reach 141.17 before closing lower on the session leading the 10-year yield higher by a single basis point to stand at 1.22%. Efforts by the Bank of Japan to deter financial collapse went unnoticed after they injected ¥8 trillion into the banking system. Nevertheless stocks collapsed and put in the worst back-to-back performance since the 1987 crash. Investors liquidating stocks and repatriating funds seeking the safety of government debt weighed the situation carefully. Recent warnings from Moody’s over a possible “tipping-point” for the fiscal health of Japan didn’t go unnoticed with the cost of insuring government backed bonds rising to a record high. The auction process aimed at raising funds to rebuild the devastated area begins midweek with a ¥1.1 trillion ($13.5 billion) 20-year auction.
European bond markets – Following a double-digit daily collapse in the benchmark Japanese stock index, investors followed suit on the continent. Fears over a global slowdown stole the crown from the European Central Bank, which recently pre-ordained a monetary tightening. German bunds responded to the need for safety and outpaced gains by peripheral nation’s debt. The 15-basis point slide in the benchmark yield was the biggest drop in two years. June bunds rose to a session high at 123.69 before paring gains, while shorter-dated euribor contracts added around 11 basis points where gains were heaviest at further maturities. The june11/June12 calendar spread for example narrowed by 11 basis points as the nearby contract saw implied yields fall by just two basis points.
British gilts – June gilt futures gapped higher at the open leaving the session low at 118.29 before fears for the health of the global economy propelled the contract to a high for the day at 119.03. The contract has subsequently eased as radiation levels subside in Fukushima and last traded at 118.44 to yield 3.49%. An index of home values added to the bullish sentiment given a lackluster gain.
Canadian bills – Bills managed to outpace Eurodollars on Tuesday as Canadian credit markets moved to price out some of the monetary tightening that was evident. Investors responding to sliding commodity prices on account of risks to growth from Japan pushed the yield curve lower by 15 basis points. The 10-year yield fell six basis points keeping a 10 basis point cushion beneath U.S. treasuries.
Australian bills –The RBA helped boost Australian credit markets overnight while the panic emanating from Japan cemented gains for yields. The Reserve Bank said the restraint evident in household borrowing coupled with a rising debt-servicing burden outweighed rising investment among mining companies amidst a boost to demand from Asian nations. Implied yields on bills slid by a parallel 25 basis points across the curve. Investors had tiptoed towards pricing out further monetary tightening as noted yesterday with Asian turmoil underpinning a powerful sweep towards a totally neutral stance at the Reserve Bank. Implied bill yields one-year forward fell below 5% for the first time in six months as futures prices surged.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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