Bond traders gripped by inflation fears

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%.

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