Tame inflationary pressures in the world’s leading economy poured cold water on the views of bond bears and sending bond prices higher around the world. Meanwhile, the prospect that Greece, the eldest of the Generation Bailout clan, might yet default on its bond holdings despite €110 billion in financial aid has sent yields on peripheral nations’ debt surging yet again. A German offer to “help” isn’t quite cutting the mustard.
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European bond markets – German Deputy Foreign Minister Werner Hoyer said that Germany could help in the event that Greece opted to negotiate leniency with its bond holders. Finance Minister Schaeuble said on Thursday that restricting for Greece might be the way to go while on Friday he sounded a little remorseful and said that investors didn’t quite react to his message the way he’d intended. The German yield curve initially steepened following a higher than forecast reading of consumer prices during March, but as selling picked up around the periphery of the Eurozone, even the inflation-sensitive two year schatz reversed course sending yields lower along the yield horizon. The June bund surged to a session high of 121.20 slicing five pips off the 10-year yield to 3.38% while the two-year yield dipped to 1.84%. Meanwhile Irish eyes were doing anything but smiling as sellers tore a strip off bond prices. The two-year yield screamed 25 basis points higher to 8.45% while that on the benchmark 10-year jumped slightly more to yield 9.29%.
Eurodollar futures – Richmond Fed Chief Jeff Lacker warned that the FOMC shouldn’t let inflation runaway and urged a reversal of easy over-easy monetary policy. But a tame consumer prices report on Friday just stole his headlines as CPI came in on time with a 0.5% increase. The 2.7% annual pace looks better when all of those nasty food and energy components are stripped down to the wire leaving it rising at a far-less problematic 1.2% pace. Implied yields on three-month Eurodollar futures slid by 11 basis points at deferred maturities while treasury notes jumped for joy bringing yields down by seven basis points. The drop in yield to 3.42% ignored a later above-expectation gain in the University of Michigan consumer confidence index, which rose to 69.6 in April after 67.5 in March.
Japanese bonds – Government bond prices finished with the first weekly gain in four as the stock market slipped and the Japanese yen threatened exporters’ earnings with a half-hearted rally. The flight to safety continued at the end of a week in which worries over the unresolved nuclear crisis grew forcing 10-year yields to their softest in 10 days at 1.27%. June JGB futures prices rose just two pips to 139.10 by the close.
British gilts – Implied yields softened another notch to close a week in which the year-end short sterling future made a healthy gain of 25 basis points. The cash market moved to delay the onset of monetary tightening pushing expectations out along the time horizon after inflation data surprised with a shortfall for March. Admittedly that still leaves inflation running at two-times the Bank of England’s target rate of 2% but helps dovish members fight the cause of no-change in policy for now. The yield on the benchmark 10-year gilt fell by eight basis points on Friday as the June gilt future surged by 80 ticks to 117.92.
Canadian bills – The softer tone to U.S. inflation helped encourage buyers at the Canadian short-end with BAX futures gaining by eight pips at deferred maturities. The Bank of Canada earlier in the week left its policy stance alone but said it expects stronger growth as well as muted inflation on account of a rising domestic dollar.
Australian bills – There was little change in market expectations for interest rates on Friday although the tone was set from afar in the nation’s largest customer. Chinese first quarter growth was slightly higher than forecast coming in at 9.7% encouraging prospects for further policy tightening from the world’s number two economy. Bill prices were unchanged in Australia as the threat of action from China offset the nevertheless healthy set of data that accompanied today’s report. Bond prices in Australia made gains with the benchmark 10-year yield falling by three basis points to 5.57%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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