Yields continue to rise in response to an improvement in the response to the Japanese earthquake. However, as investors dust themselves down and observe the wreckage there seems to be a blossoming challenge to global growth that’s keeping a lid on the euphoric rebound in optimism. Losses for bond investors are slowly diminishing on the day as core problems return to focus in the Eurozone.
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Eurodollar futures – The June Treasury futures contract is off its worst levels of the day as the knee-jerk rotation from equities to bonds stops in its tracks. Equity prices have struggled to build on a two-day recovery as fears over nuclear leaks at the Fukushima Daiichi power plant subside. The June contract stands at 120-00 to yield 3.34% while Eurodollar futures remain in the red although off an earlier eight basis point shift in yield expectations.
Japanese bonds – Japanese government bond prices fell by the most in five weeks sending the yield three basis points firmer at the 10-year horizon as investors get used to the idea of additional supply that will lift the nation’s outstanding debt to more than twice its GDP. Finance Minister Noda said it was too early to put a number on any rebuilding package and is still assessing the carnage set off by the earthquake twelve days ago. An Economic and Fiscal Policy Minster said that the reconstruction fund would be paid for through bond issuance but reduced by spending cuts elsewhere and additional tax measures. The June JGB future fell by 39 ticks to 139.35 to yield 1.24%.
European bond markets – The earlier strength apparent in the euro currency has fizzled and the unit is now weaker against the dollar as fears again resurface over the challenges to finding a lasting solution to the sovereign debt crisis. With less downwards pressure on yields in response to the apparent success of relief efforts in Japan, investors continue to switch out of government paper today lifting the yield on the German benchmark bund two pips higher to 3.25%. However, the peripherals are really struggling in this environment. Not only is the ECB affirming that at its April meeting it is on track to raise short rates, but tensions between German and Irish lawmakers are spooking investors in anything other than ultra-safe debt. Irish yields rose by 18 basis points while the cost of borrowing to the Greek government rose 23 basis points. Neither government wants to make further concessions to have bailout terms made less stringent. Three month euroibor, the cost of interbank funding rose to reflect the imminent change in borrowing costs across the Eurozone reaching 1.185% on Tuesday making it the highest since June 2009.
British gilts – A fifteenth straight month for the consumer price index above the Bank of England’s 2% target saw short sterling prices sink on Tuesday. The cost of living hit 4.4% in February and towers more than twice the height of the Bank’s 2% ceiling. While the central bank has pinned much of the overage on government tax increases and surging commodity costs, money-market participants have to deal with the reality of the implied yield curve and the steep yield curve. Year-end forward price imply at least three quarter point increases in the short rate. On Wednesday the Bank will reveal the arguments put forth in defense of keeping policy on hold when the March minutes are released. The June gilt future slid by almost one point at its worst price of the day with the contract subsequently halving the day’s loss to stand at 117.87 carrying a yield of 3.61%.
Canadian bills – Bill futures prices reached the session peak after the release of February retail sales data that severely disappointed analysts’ expectations. It seems that government efforts to restrain borrowing from snowballing out of control may have kicked in early. February sales were forecast to rebound, but in the event fell for a second month. Implied yields are still higher on the day, but the data seemed to cap further rises. The year-end contract infers a just two further increases in the short rate cost of borrowing by the Bank of Canada above today’s 1% level. June bond futures fell 22 ticks to 121.18. Leading indicators constructed out of January input values rose to the fastest pace in nine months.
Australian bills – Government bond prices fell as yields spun four basis points higher to 5.44% and still almost half of one percent above the Reserve Bank’s benchmark short rate of 4.75%. Money market dealers continue to err on the side of an imminent rate reduction rather than an increase at the forthcoming April meeting following the Japanese disaster. However, that sensation continues to melt and short-dated three-month bill prices fell to reflect that thaw.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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