Bond gains offset by Dallas Fed speech

A rollback of some of the recent relief in response to the efforts by Japanese engineers to restore power to the crippled nuclear-power plant created pressure on equities and drove government bonds higher on Wednesday. It appears that investors are having something of a rethink in the aftermath of the drastic events that left more than 9,000 people dead. News that tap water in Tokyo is unsafe for infants and that there is unlikely to be a v-shaped recovery for the local economy unwound some of the determination displayed earlier in the week by investors hoping that the bullet train could be quickly dropped back on to the high-speed rail without the blink of an eye.

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Japanese bonds – Four-times the cost of Hurricane Katrina’s clean-up operation. That’s what the government projected today when it estimated that disruption to the Japanese cost might rise to a staggering ¥10 trillion or $309 billion. The government hinted it might set up a relief agency to coordinate a crisis response as it filtered its way through the supply-disruption left behind. There is likely to be a tremendous bond issuance for as far as the eye can see to pay for the disruption and the speed of the rebound is likely to be painfully slow as power-outages across several regions take time to carry out. The government reduced its growth forecast by 0.5% for the next fiscal year. Yields at the 10-year horizon dropped sharply by three basis points to 1.215% while the June JGB future added 46 ticks to 139.86.

Eurodollar futures – News that the Japanese recovery is likely to be slow coupled with preparation for a ground troop assault in Libya turned investor appetite for risk lower and boosted demand for government paper. The June Treasury future also rose after a 16.9% dip in new home sales in February. Sales were predicted to rise to an annual pace of 290,000 units yet managed to surprise with a drop to 250,000. Eurodollar futures responded by gaining three basis points as the yield curve softened. Comments by Dallas Fed President Richard Fisher crossing the wires during late morning trade to the effect that the market had correctly discounted an end in June to the Fed’s policy of quantitative easing saw note prices unwind earlier gains leaving yields at 3.33%.

European bond markets – Fears that the Portuguese government was likely to be dissolved in the face of a near-impossible vote to enact deficit reduction fuelled demand for German bunds. The June contract earlier reached 122.56 sending its yield four basis points lower to 3.21%. The euribor strip also felt the benefit of further threats arising from sovereign debt as the curve eased by up to four basis points.

British gilts – Gilt prices remained higher following a downward revision to this year’s growth forecast in Wednesday’s budget delivered by the Chancellor, George Osbourne. The reduction from 2.1% to 1.7% lessens the likelihood of tighter monetary policy at the Bank of England. Earlier the central bank released minutes of this month’s policy meeting, which revealed little sense of urgency in dealing with runaway inflation. The Bank said that it could afford to “wait and see” given the abundant slack in the economy and impending threats to growth including sizeable public sector job cuts. Short sterling prices added up to five basis points rebounding from a drubbing after a 4.4% inflation reading earlier in the week. June gilt prices jumped to a session peak at 118.54 with the 10-year yield sliding by six basis points to read 3.53%.

Canadian bills – Government bonds turned south in sympathy with Treasury prices following comments from the Fed’s Fisher. The June government bond future earlier traded to 121.55 before sliding to 121.17 lifting the yield to 3.19%.

Australian bills – Aussie government bond yields fell by six basis points as investors became suspicious of the lack of positive news out of Tokyo. The benchmark yield slid to 5.38% as dealers heard the caution from the Japanese government on prospects for a springboard rebound after the recent earthquake. The fact that the authorities believe the recovery may linger hampered the recent progress made by stock index benchmarks and drove up demand for the relative safety of government paper.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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