Bond prices are struggling to keep their heads above water at the start of a new week as investors tread cautiously ahead of a raft of global data releases that likely will maintain pressure on central banks already considering the notion of tightening monetary policy.
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Eurodollar futures – Benchmark government debt yields remained close to a seven-week high with little noticeable impact in the aftermath of a late-night settlement among politicians that averted a government shutdown. The Democrats agreed to spending cuts of $38 billion and so less than the $61 billion sought by Republicans. With inflation at the forefront of the minds of fixed income investors these days, bond prices are trading defensively. The June 10-year Treasury note future is almost back to unchanged on the day having slipped in European trading as investors look at rising commodity prices to recognize the basis of the problem. Recovering economies have bid up scarce resources lifting commodities to a two-year high recently. The Fed seems less concerned than elsewhere in the world and says it isn’t about to lift policy. Some members on the FOMC disagree and such consternation is helping drive a bearish undertone for U.S. bonds. The yield on the benchmark stands at 3.58%, while implied yields on Eurodollar futures eased by one pip.
European bond markets – European markets are relatively quiet after an eventful week in which Portugal requested financial assistance and the ECB served notice of an interest rate increase. Investors’ nerves will remain on edge until Friday when the latest Eurozone CPI data is released and is expected to gain at the fastest in two years. We’ll be listening for remarks from ECB officials as to whether they expect to keep on tightening in response. Bund yields in Germany are unchanged at 3.47% having earlier reached 3.50% for the first time in 19 months. The two-year yield hit its highest since December as investors brace for more action from the central bank. Euribor futures remain unchanged on the session.
Japanese bonds – The price of government bonds in Japan also reached a seven-week low before closing at an unchanged reading of 1.305%. June JGB futures closed with a five tick gain on the session at 138.67 after a government official reportedly said that the nation could fund its reconstruction efforts without relying on the Bank of Japan to underwrite fresh issuance. February machine orders slipped by 2.3% in the month to February for a much sharper fall than investors were braced for leaving the annual change at 7.6%.
British gilts – Gilt prices were unmoved by a Sky News interview with MPC member Andrew Sentance who said he maintained his call for a half-percentage point increase in monetary policy at last week’s meeting. The June contract last traded at 116.09 to yield 3.80% at the 10-year maturity. Short sterling prices gave up earlier gains of as much as three ticks to trade unchanged on Monday.
Canadian bills – Ninety-day bills of acceptance futures are trading lower ahead of Tuesday’s Bank of Canada meeting. Dealers don’t expect a change in policy after the Bank warned that future rate increases would have to be carefully considered in light of the appreciation of the exchange rate, which tend to dampen inflationary pressures. However, implied short-end yields have risen faster than comparable yields across the Eurodollar curve as investors fear that the Bank of Canada will be forced into a tightening to deal with the somewhat faster pace of recovery than it saw earlier in the year. The Bank will discuss the March employment report, which included a 90,000 gain in full-time employment as the latest sign of economic health. The net-change in employment last month, however, was a marginal decline as more part-time jobs were lost. The 10-year government bond fell to add a further two basis points to the yield of 3.45%.
Australian bills – During the first week of April investors have begun to expect more interest rate medicine to flow from the Reserve Bank of Australia. Following a three-week string of rising commodity prices indicative of a healthy economic rebound, investors remain wary of building inflationary pressures that is adding a sense of urgency to remedial monetary measures around the world. According to pricing in the swap markets the Reserve Bank will hoist its official short-rate by 31 basis points during the next year. The market reflected just half that at the end of March. The yield on the benchmark government bond eased by one pip to close Monday at 5.64%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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