Bond demand stoked by elevated nuclear fears

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.

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