Bonds soar higher on tame inflationary pressures

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.

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