Bond prices edged lower at the end of a month in which investors drove yields around the world. Global equities continue to advance, non-plussed by possible signs of economic weakness in the world’s leading economy.
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Eurodollar futures – Treasuries put in their best performance in eight months during April with 10-year yields sliding by 17 basis points while two-year yields fell more aggressively by 20 basis points. The Fed said it wasn’t thinking about ending its extended period of low interest rates anytime soon as it lowered the first quarter growth forecast while at the same time raising the threat from inflationary pressures. In Friday’s reports the government pointed to a mild slowdown in consumer spending while confidence among shoppers dipped in the University of Michigan survey. The Chicago PMI dipped faster than expected to 67.6 in April after 70.6 the prior month. Eurodollar futures took their prompt from the damp bond market tone and pointed to slightly higher yields. June Treasury note futures rebounded from earlier profit taking and stand lower by one tick at 120-30 to yield 3.31%.
European bond markets – The short-end of the German yield curve came under further pressure on Friday after a higher than predicted reading of Eurozone consumer price inflation. The index rose to 2.8% during April according to preliminary estimates accelerating from a 2.6% pace last month. Two-year yields underperformed 10-year bunds although the June bund contract later rose to show a gain on the session at 122.69 and eroding a daily increase in yields. The negative inflationary tone is unlikely to offset weakness displayed in a German retail sales report for the month of March in which sales surprisingly slumped despite expectations for a gain. The 2.1% drop between months dragged the year-over-year change to -3.5%. Comments from ECB member Yves Mersch reminded the cash market that the ECB wouldn’t shrink from its duty to battle against rising prices and as such three-month cash prices continued to rise for an eighth day. The three-month Euribor benchmark rose to 1.385% causing implied yields across the futures yield curve to rally too.
British gilts – Fixed income trading is closed for the Royal Wedding celebrations.
Japanese bonds –A record slump in industrial production in the wake of the nation’s worst earthquake in at least a century provided a solid backdrop to bonds during April. The yield on the 10-year government bond settled at a five-week low at 1.20% as June delivery JGB futures rose 14 ticks to 140.08.
Canadian bills – Canadian implied yields bucked the American market after a government report proved a firmer exchange rate probably weighed on demand for the nation’s manufacturing output. February GDP unexpectedly contracted by 0.2% leaving the economic expansion ahead by 2.9% over the year compared to 3.1% at the end of January. Bill prices rallied in Montreal narrowing the spread over Chicago-traded eurodollar futures. Government bonds due for June delivery are staging a second attempt at the session high and recently traded at 121.52 sending the yield lower to 3.21%.
Australian bills – Strength in the Aussie dollar is a sign of successful government policies that have delivered employment growth, fiscal health and rising commodity prices, according to Australian Treasurer Wayne Swan. Despite a slip in regional share prices overnight the credit market moved to reflect a stronger prospect of monetary tightening after Mr. Swan’s boast. Government bonds moved in the opposite direction as the curve flattened and the 10-year yield dipped to 5.41%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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