Bonds pare huge gains as equities recover

The desire to hold the safety of government bonds appears to have passed. A recovery overnight in the Nikkei 225 stock market index from a 5% slump has equity prices rebounding around the world. Meanwhile, analysts the world over are poring over the anatomy of a spike in the value of the yen that currently represents a capitulation in the catalog of Japanese disasters in the space of less than one week. It’s almost as if they believe the potential disaster at the failed nuclear power plant in Northern Japan is under control. Equity markets opened in typically good spirit for St. Patrick’s Day as though the world was back to normal. Bond yields around the world are on the rise again.

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Eurodollar futures – At the height of panic-buying of government debt on Wednesday U.S. benchmark yields tumbled to 3.15%. With equity prices rebounding hard today, investor demand for treasuries has fallen by the wayside and yields have crept back up to 3.25%. The pause in Japanese output and its removal from trade relationships for a currently undetermined period is harmful to global growth. Apart from a lower trajectory for growth, certain commodity prices have also come well off the boil and lowered inflationary concerns. And so on top of demand for safer government paper, dealers have also flattened yield curves during the crisis. The Eurodollar curve has flattened significantly with the June11/June12 one-year calendar spread coming in from 110 basis points exactly one month ago to just 62 basis points today. Likewise the Dec11/Dec12 spread has narrowed from 143 basis points in February to 106 pips today. The Eurodollar strip faced losses also following the February CPI report, which came in a shade worse than expected with the headline pace running at 2.1% in February and up from 1.6% the month before.

Japanese bonds – Fears that the crisis in Japan was worsening sent 10-year yields to their lowest in two months to 1.19% overnight and in the face of stock index losses surpassing 5.1% shortly after the opening. Bond futures, however, eased by one pip to close at 139.71 having earlier reached a session peak at 140.39.

European bond markets – June bund prices are lower by 60 pips sending the 10-year yield higher by five basis points to 3.14%. The gravity of the disaster in Japan pulled yields lower yesterday, especially in light of comments from one central bank who warned that the situation would be a factor in rate decisions at the forthcoming policy meeting. But as global stocks rebound, yields are starting to trek higher with implied yields on short-dated euribor contracts adding as much as eight basis points today. The bund contract has virtually unwound all of its positive work from midweek.

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