A burst of spring-induced activity in the American construction market weighed only temporarily on prices of U.S. government debt. Yields remained depressed despite a blunt warning earlier in the week from Standard & Poor’s that the government risks its AAA-mantle. The rebound in Wall Street stock prices was muted in thin pre-holiday trade forcing investors to keep a cautious bid behind the safety of U.S. bonds. Ahead of lunchtime bond prices are adding to gains as stocks mark time.
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Eurodollar futures – Futures prices have turned only marginally lower following a report showing a decent rebound in housing starts for the month of March. The 7.2% rebound was slightly lower than predicted by analysts but was more than expected on account of a sharp revision to the previously reported data series. Housing starts rose to an annualized pace of 594,000 units compared to 534,000 in February. A rise in building permits, often taken as a precursor of forward-looking activity, also rose sharply and while the 10-year note temporarily dipped on the news, it remains barely lower on the day leaving the benchmark yield close to its lowest in three weeks at 3.36%. Eurodollar futures have slipped by one tick on the day while implied yields have now eased by around 40 basis points in less than two weeks. The June Treasury note future trades at an unchanged level of 120-06.
Canadian bills – Money traders balked at a wayward inflation report on Tuesday as consumers paid higher prices across the board in light of rising energy costs and food shortages. The acceleration in the Bank of Canada’s core inflation index to 1.7% leaves it comfortably beneath the 2% ceiling, but its dramatic ascent may well prompt a discussion of monetary tightening faster than assumed when the central bank left rates alone at its recent meeting. The government said that all major categories faced rising prices last month while in most cases the pace accelerated. Bill prices were shot down out of the sky with the December expiration running a double-digit loss as implied yields added 10 basis points to 2.06%. The Bank’s current short rate of 1% understates the benchmark three-month borrowing cost by about 20 basis points meaning that investors now expect around three separate quarter-point rate increases before the end of 2011. The spread between U.S. and Canadian government yields at the 10-year horizon narrowed by five basis points as American benchmarks stood still while Canadian bonds tumbled in light of today’s consumer price report.
European bond markets – A rebound for European stock prices after a day of heavy losses around the world took some of the pressure off German bund prices by midday. The June contract surged on Monday as fears that Athens might have a change of heart concerning its promise not to renegotiate its debt with bond holders’ boosted appetite for safe haven. The contract reversed course on Tuesday steadying at 122.13 lifting the yield to 3.28%. PMI data for the Eurozone was mixed with the composite reading benefitting from a rise with manufacturing activity gaining while service activity dipped. Overall activity remains buoyant. However, a Eurozone-wide reading of consumer confidence dipped to -11.4 from -10.6 in March. Euribor futures continued to rise with the exception of the nearby June contract. Implied yields declined across the strip by seven basis points despite comments from ECB official Nout Wellink who said that the central bank’s earlier rate increase sent an “extremely important” message to the markets and said that the fight against inflation would be the Bank’s first responsibility.
Japanese bonds – With Asian equity prices spiraling lower on the coattails of North America’s poor performance on Monday, government bond prices were bid higher. June JGBs were lifted 13 ticks higher to 139.49 sending the yield three basis points lower to 1.22%. Sentiment remained negative with a March consumer confidence reading expectedly declining following the recent spate of natural disasters.
British gilts – Short sterling prices eased the day before the Bank of England releases the minutes of the April policy-setting meeting. Dealers had no fresh data to parse and concentrated on the risks that doves on the committee may be leaning towards imminent tightening as the meeting was scheduled before last week’s surprise dip in inflation. June gilt prices made late-session gains to add 46 ticks to 118.38 yielding 3.55%.
Australian bills – Short-dated bill prices jumped by four ticks sending implied yields lower after the April RBA minutes revealed a bias to maintain interest rates at 4.75%. The market is biased towards further tightening throughout the remainder of the year seeing the current pause as merely temporary. The 10-year government bond yield dipped by two basis points to 5.48%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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