Yields search for direction after mixed data

A fourth monthly breach of the European Central Bank’s 2% ceiling for inflation initially sparked renewed buying of the single currency as dealers rode roughshod over sovereign debt worries, which they hoped might become merely a memory. But as Portugal’s President consulted with former leaders, investors anticipated a nearby election selling its domestic debt cognizant of the implications of a highly probable bailout. Lackluster U.S. data failed to provide a lead for North American leads and for choice dealers continued to buy into a budding rebound ahead of a key Friday labor market report.

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European bond markets – Telling of the current pricing of the European yield curve, German bunds pared losses after accelerating inflation rose to its fastest in more than two years. The June contract matched its midweek low before rebounding. An April rate increase has been so clearly flagged that credit markets have had ample time to reflect future moves. Euribor futures also fell sending implied yields back to the highs reached on March 10 when President Trichet forewarned that the ECB would tighten policy next month. Core German yields dipped to 3.32% as pressure grew on peripheral debt. Portugal’s two-year yield surged 37 basis points while its 10-year yield rose by 21 basis points. The inflation constraint on the ECB was further evidenced by a tightening labor market with German unemployment falling by 55,000 sending the national rate lower to 7.1%.

Eurodollar futures – June Treasury notes are off the session peak but remain in the black for a six-tick gain to 119-10. Yields declined following a lackluster initial claims report showing a slide of just 6,000 first-time claims for unemployment benefit to 388,000. Last week’s reading was revised higher. Demand at a seven-year auction midweek met with healthy buying as investors responded to a string of yield-lifting losses for bond prices. Thursday should be a quiet session ahead of tomorrow’s non-farm payroll report for March. Last month saw the rate of household unemployment decline below 9% for the first time in 22 months. Ahead of that report came the Chicago purchasing managers index today, which retracted from a prior reading of 71.2 to 70.6. A reading of factory orders for February unexpectedly fell by 0.1% after a 3.3% surge in January. The benchmark 10-year yield currently stands at 3.40% for a decline of three basis points on the day. Eurodollar futures have gained by about the same as the curve moves lower in parallel.

Japanese bonds – Bond prices in Tokyo fell adding upwards pressure on bonds and lifting the 10-year yield to 1.25% to end the fiscal year. Ahead, the nation faces a mountainous task of rebuilding its economy, which in turn requires a tremendous amount of funding that could put further upward pressure on yields as the Bank of Japan seeks buyers. Further evidence that the pre-disaster economy was recovering nicely came in the shape of healthy supermarket orders, housing starts and construction orders during February. The June JGB future traded in a forty-tick range to settle with a minor gain at 139.59.

British gilts – Gilt prices are ahead on Thursday despite a Nationwide housing report indicating a 0.5% monthly advance in home values. The suggestion of recovery strengthened investors’ conviction that the Bank of England would be forced to raise rates imminently. After awakening from such a nightmare scenario, short sterling futures pared losses and trade with merely minor losses on the day. The June gilt trades at 117.43 to yield 3.63% for a yield decline of four basis points.

Canadian bills – A GDP report evidenced a still healthy Canadian recovery and matched forecasts for a 0.5% monthly gain leaving the value of the economy 3.3% above that of one year ago. The economy advanced in the first month of the year spurred mainly by a 2.85 jump in activity amongst manufacturers including metal-makers and auto-parts producers. There was a negative note within the report in the form of the first dip in output among miners and oil and gas extraction companies for the first time since September. There was little response credit-wise to today’s report with 90-day bills of acceptance clinging on to gains as dealers kept a keen eye on the U.S. short-end. Government bond futures saw earlier gains evaporate not necessarily in light of the GDP reading but because of signs of weakness in the U.S. treasury patch. The June government bond trades at 120.48.

Australian bills – The February retail sales report didn’t disappoint dealers looking for further signs of buoyancy in the consumer sector. During February retailers saw volumes increase by 0.5% as insurance checks related to flooding damage were cashed. Private sector credit also rose to stand 3.4% higher than a year ago. However, it seems that credit markets were most influenced by weakness in the construction market here a report showed building approvals fell by 7.4% on the month with annual activity 21.8% lower. Implied yields on 90-day bill prices slipped by three basis points along the curve and the lower yield environment spread to the long end where benchmark 10-year yields dropped by three basis points to 5.45%.

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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