Bonds rose sending yields to their the lowest in a month after the Federal Reserve hosted its first post-meeting press conference. Some remain concerned that investors will, after the Fed concludes its second wave of purchases totaling $600 billion of bonds in the open market, demand higher yields. However, such a theory continues to run headlong into data pointing to a weakening in the recovery process. The first quarterly GDP reading for 2011 fell short of expectations conveniently one day after the Fed pared its growth forecast while boosting its projection for inflation.
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Eurodollar futures – Speaking from his home turf in Washington, Fed Chief Bernanke remained in control of Wednesday’s press conference and said that the recovery remained short of enough steam to allow the Fed to start taking away its monetary medicine. The news, although widely discounted, continued to provide ammunition to bond buyers after the event. Thursday’s 1.8% annualized quarterly growth rate for the three months ending March was lower than the consensus 2% prediction, and marked a significant slowdown from the final quarter’s surge at a 3.1% pace. Weekly jobless claims data was also disturbingly weak with claims rising by 26,000 to 429,000 through last weekend keeping the series above the supposed 400,000 watershed separating jobs growth from weakness. Eurodollar futures made gains of 10 basis points at deferred maturities, although the 2012 strip was higher by around six basis points. The June 10-year note future added a half-point to trade at 120-28 yielding 3.32%.
European bond markets – Eurozone bond prices remained firm taking a cue from North American markets. Yields in core Europe fell as a sliver of good news emerged in the form of a reduced reliance by Greek banks on emergency ECB funding during February. Investors let go of the bit once gripped firmly in their teeth surrounding a restructuring of Greek government debt allowing 10-year bond yields to slide sharply. Germany’s rate of unemployment remained at 7.1% during March after a 37,000 decline in the number of unemployed. Euribor futures rose sending implied yields lower by three basis points. June German bunds added half a point to 122.49 lowering the yield by five basis points to 3.27%.
British gilts – Buyers of short sterling futures made a mockery of yesterday’s sellers as losses for the contract were reversed in light of the weakest consumer confidence reading since March 2009. The GfK report pointed to further consumer weakness ahead with more respondents stating that now was not a good time to take on a major purchase. The sterling three-month strip was higher by 10-basis points while the yield on the June gilt tumbled by seven pips to close below 3.50%.
Canadian bills – Weakness in the U.S. economy created a positive feeling for the front end of the Canadian yield curve where prices of 90-day bills rose by four basis points as implied yields declined. The June government bond yield matched the gain seen by comparable treasury notes sending the nation’s cost of borrowing four basis points lower to 3.22% while the gap between the two has narrowed recently to 10 basis points.
Japanese bonds – Bond futures for June rose after a record slump in industrial production across the nation following the March earthquake. The contract rose by 14 ticks to 140.08 keeping the 10-year yield down towards its lowest in a month at 1.20%. The bond environment remained friendly in light of the reminder of the impact of last month’s devastation and despite a 1.6% rebound for stocks on Thursday.
Australian bills – Bill prices were largely unchanged overnight. The Aussie dollar rallied to its strongest ever reading against the greenback as risk aversion gathered pace. The strengthening Aussie unit conceivably weighs on inflationary pressures, which help explain why 90-day bill prices didn’t move to discount a resumption of the tightening from the central bank. Government bond yields slipped by three basis points to 5.45%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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