The allure of bonds remained intact despite a significant rebound from panic-stricken selling in Tokyo stocks and is likely to remain intact until radiation-watch ceases to be the norm. Bonds have also found favor as signs of a downturn in growth keep cropping up. Mortgage applications during the last week failed to show a pick-up in demand despite a decline in financing costs, while a separate report showed a downturn and prospects for further weakness across the U.S. housing market.
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Eurodollar futures – Home-owners responded to a 14-basis point drop in 30-year mortgage rates as refinancing activity rose by 0.9%. However, applications for new purchases slid by 4% despite the lowest mortgage rates since mid-January. And there was more bad news in a February reading of housing starts, which unexpectedly slowed to an annual pace of 479,000 marking a 22% slide on the prior month. Building permits also declined by 8.2% and are used to gauge future construction activity. Following the report, Treasury futures rose to the highest point of the day for a half-point gain and shaving two basis points off the 10-year benchmark yield to 3.28%. Eurodollar futures at expirations from June 2012 and beyond saw implied yields dip by at least four basis points after today’s report, brushing off slightly firmer than hoped for producer price data. The benchmark yield remains within eight basis points of Tuesday’s low at 3.20% as all eyes remain on radioactivity readings around the damaged nuclear power point north of Tokyo.
Japanese bonds – A 20-year auction that had earlier caused a steepening of the yield curve went off surprisingly well on Wednesday as dealers had forced rates high enough to improve demand for recovery bonds. In London, interbank loan rates crept higher in wake of the Japanese disaster with overnight lending rates jumping close to 0.5%. Three-month Libor rose by a further basis point to 0.2% despite a third day of overly generous liquidity provision by the Bank of Japan. The June JGB future slid by 40 ticks to close at 139.88, while the 10-year yield remained unchanged at 1.20%.
European bond markets – An ECB banker noted that the central bank would consider events in Japan at its April meeting when deciding its monetary policy. The ECB is unlikely to halt its plans to tighten monetary policy but may make the case plain that further tightening will be considered carefully. Don’t forget that President Trichet earlier remarked that any change in its policy should not be seen as the beginning of rapid change. An inflation report today confirmed that inflation across the Eurozone exceeded the central bank’s ceiling of 2% in February for the third month. June bunds are 17 ticks higher at 123.19, although off a session high at 123.39 to yield 3.12%. Short-dated euribor futures are largely unchanged.
British gilts – British gilt futures are trying hard to maintain positive direction midweek following a larger than expected drop in the jobless claimant count. Claims were due for a mild rise, but ended up falling by 10,200 during February leaving unemployment at 1.45 million and the lowest since February 2009. Yet within the data, public sector employment fell sharply at year end and ahead of savage job cuts likely to kick-in during the present quarter. Implied yields at the short end unwound some of Tuesday’s optimism following the labor market data rising by two pips while gilt yields eased by one pip to 3.52%.
Canadian bills – The long end of Canada continues to outpace the yield performance of U.S. Treasuries. Even following a robust reading for January manufacturing data, investors continue to pressure yields lower. Manufacturing sales surged by 4.5% on the month blowing guesses of just 1% out of the water. The 10-year yield fell by four basis points to 3.16%, widening its cushion below treasuries to 13 basis points. A firm domestic dollar is likely keeping inflationary pressures in check despite likely restraining demand for Canadian goods. The likelihood of any change from the Bank of Canada in this environment continues to look slight, helping propel bills of acceptance to a four tick gain on the day.
Australian bills – The rebound in Japanese stocks and resuscitation for Asian dollars saw some slippage in credit markets in Australia overnight following exceptional gains on Tuesday. At that time dealers wiped out expectations for further monetary tightening and it appears that profit taking may have been behind the four-pip increase in implied yields on Wednesday. Aussie government bonds rose maintaining pressure on the benchmark yield, which eased by one basis point to 5.35%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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