Treasury bonds and notes saw an acceleration of losses as equity prices staged a strong rebound and the U.S. Treasury said it would edge towards the exit by selling mortgage backed securities. The demand for government-issued paper eased as the Japanese government said it could see “light at the end of the tunnel” believing that power sources would soon be restored to overheating nuclear reactors damaged in the wake of the tsunami.
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Eurodollar futures – It’s a Tokyo holiday but the news flow has turned more positive over the weekend with hopes that the worst of the nuclear crisis may now have been averted as engineers rush to restore power to the disaster-stricken plant. The rush to buy government bonds has thereby come to an abrupt halt and with equity indices up by 1.5% within the first hour of trading dealers are fast-rotating between asset classes. An earlier report showing that the national economy came off the boil in February has been overlooked. The Chicago Fed’s national activity index peaked in December and turned negative in January and even more so in February. The data incorporates 85 data points including output, employment and inflation and the further slip below zero last month indicates a lesser pace of expansion and lower price pressures. However, this report was trumped by a release from the Treasury stating that it would start to sell off its $142 billion MBS portfolio in piecemeal fashion without stating any timing. The New York Fed is scheduled to wind up its bond purchase program in June and together these two factors clearly represent a move to the ultimate end of monetary stimulus. Eurodollar futures slide by 13 ticks at the long end while the June note future is three-quarters of a point lower sending yields rising by seven basis points to 3.34%.
Japanese bonds – The benchmark yield rose by one basis point to 1.20% as better news reports came in indicating that the peak of the crisis may now be behind the battered nation. The yen eased once again at the start of the week taking further pressure off bond demand. June JGBs rose by one tick to 139.73 while estimates for the repair package rose to ¥10 trillion or approximately $125 billion. While the government issues the paper via the Bank of Japan investors will be watching closely at just how strained relationships between the two become. The Bank has stated that underwriting already towering government issues would risk its credibility.
European bond markets – ECB Governor Trichet is scheduled to discuss monetary affairs at the EU parliament on Monday and dealers will be keen to hear whether the Japanese disaster has at all softened the central banker’s attitude to inflation. Earlier Luxembourg’s central bank chief and fellow European policymaker Yves Mersch noted in a quarterly bulletin that the ECB must show “strong vigilance” to prevent the inflation outlook from materializing. The June bund contract is close to session lows and stands at 122.25 for a session loss of 38 ticks. The 10-year bund yield added three basis points to 3.21%.
British gilts – Rising stocks and a boost to confidence from hopes that Japan has potentially turned the corner away from the threat of nuclear disaster weighed on global short ends. Short sterling contracts saw implied yields rise by up to six basis points at maturities one year forward and beyond, in-line with those on the continent. A quarterly report written before an assessment of the threat to the global economy from the impact of the Sendai earthquake showed that Britain’s central bank believes that lending among British bankers is slowly thawing. The June gilt contract rose by three basis points to stand at 3.53% as the contract dropped by 22 ticks to 118.37.
Canadian bills – Improved prospects for global recovery after last week’s high-speed derailment has caused dealers to reassess the path of global interest rates. The fallout from the Tokyo crisis caused money market participants to rethink the need for further monetary tightening. As the investing environment once again finds its feet, some of the reaction is being unwound. Canadian bills are lower as implied yields push higher in response to a heavy selloff in Eurodollar contracts. There’s no point in standing in the way of the selling even in light of a further push higher in the value of the Canadian dollar. The Bank of Canada is on hold but while evidence of weak inflationary pressures remains in place there is little likelihood that it will be forced to change its mind on the timing of tighter monetary policy. The June 10-year government bond contract fell by 46 ticks to 121.23 lifting the yield by four basis points to 3.20%.
Australian bills – News of relief in Fukushima buoyed stocks but stole back some of the perceptions in Australian money markets for an imminent reversal of monetary policy. Expectations had grown in the aftermath of the disaster with the odds of a rate reduction at the forthcoming meeting rising to one-in-three late last week. However bill prices and swap markets fell as stocks rebounded and the odds fell to one-in-eight. The implied yield on the December 90-day bill future surpassed 5% once again in light of the improving media flow from Tokyo.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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