Bonds take mid-session bid

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.

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