The Japanese yield curve steepened in response to an increase in the severity of the recent nuclear disaster after Tokyo Power said radioactive readings had increased. The government says it may have underestimated the economic damage. Global yield curves responded in unison although in most nations yield curves flattened as demand for far-dated maturities was driven also by a downbeat attitude towards commodities, whose recent surge prompted an official growth downgrade from the IMF.
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Japanese bonds – The Nuclear and Industrial Safety Agency raised its danger warning to the maximum reading of seven on the international scale as Tokyo Power reports that radiation readings haven’t stopped rising at the Fukushima nuclear power plant. Tokyo stocks dragged Asian bourses lower with the Nikkei falling at its fastest pace in four weeks closing 1.7% lower. The yield on the two-year government bond fell while 10-year bond prices fell lifting the yield one basis point to 1.315% creating the steepest yield curve in almost one year. The fear bid drew panic demand from investors in search of safe haven status. A warning from the government that it might have initially underestimated the economic damage in the aftermath of the recent disaster created more fear that paper issuance would be higher than first thought.
Eurodollar futures – Longer-dated maturities fell harder in the U.S. while shorter maturities fared well as the curve moved lower by around seven basis points. An IMF report on Monday warned that growth this year would be lower than it had predicted in its January projection. Eurodollar futures expiring from June 2012 outwards have made price gains of eight basis points as investors digest today’s darker tone to trading. The June Treasury note future has gained a half-point lowering the yield by seven basis points to 3.51% as the yield curve falls by the most in three weeks.
European bond markets – The IMF and EU fly to Lisbon to discuss the outlook for Portugal following its request for financial aid. Bonds issued by the Portuguese government failed to benefit from the safety bid lifting debt prices across the Eurozone. Only Greek debt also failed to rally. German bunds rallied by 37 ticks to 120.41 as investors flocked to its safety despite a mild acceleration in the pace of EU inflation during March, which rose to 2.4%. Demand for fixed income was also buoyed by a ZEW report showing that forward-looking sentiment among investors slipped in its April reading coming in at 7.6 after 14.1. Short-dated futures responded more to this less optimistic forward-looking indicator than to the inflation reading given that it is not only backwards looking but also based on the fact that the ECB has already shown its readiness to raise rates on inflation grounds. The gentle nudge in price pressures reported today might not stop another rate rise at the ECB but investors have already built sufficient into the yield curve.
British gilts – Consumer price pressures abated somewhat during March giving the Bank of England its first break in eight months from the ear-bashing it has come to expect from those concerned by rising inflation. The 4% year-on-year pace leaves inflation at twice the ceiling rate although the Bank lays that little fact on the doorstep of the government on account of its deficit-reducing strategy of tax-increases. Food prices fell by the most in four years as retailers tried to lure spendthrift shoppers. In a separate report the British Retail Consortium said that sales slumped during the month by the most on record. Short sterling prices leapt after the report as dealers rolled back the expected timing of an interest rate increase. Implied yields were steamrollered by up to 18 basis points. The market moved its timing from August to October as central bankers pat themselves on the back. Gilt futures for June delivery added more than one full point and recently traded at 117-00 sending the 10-year yield lower by 10 basis points to 3.70%.
Canadian bills – Bill futures jumped as the Bank of Canada left rates alone at a meeting on Tuesday. It raised its growth forecast for this year but lowered the outlook for next year. The central bank also warned against the impact resulting from the ever-stronger domestic dollar. It sounds like the Bank would like to resume rate increases but feels hemmed in by the loonie’s strength. Implied yields tumbled by around 10-basis points while the yield on the government bond slid by five basis points to 3.42%. The June futures contract added 66 ticks to 119.48 in mid-morning trade.
Australian bills – The slide in Asian benchmark stock indices boosted demand for government bonds massaging implied yields on the Sydney Futures Exchange lower by eight basis points. Australia typically benefits from buoyant Asian demand, which in turn stokes the fire beneath commodity prices. However, the dumbed-down IMF outlook for growth on account of raging commodity prices produced on Monday has harmed the Aussie and the prospects for a resumption of monetary tightening. The yield on 10-year government debt slipped by three basis points to 5.595%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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