Early bond weakness dissipates as crude oil reverses

The knee-jerk drop in government bond yields that accompanied the announcement of bin Laden’s demise is wearing off like a nerve-numbing analgesic. The argument that Al-Qaeda is rudderless following the loss of its leader and that the risk appetite hatches have been blown right off is simply Monday morning wishful thinking. Crude oil prices had fallen by a couple of dollars in response to the lower threat of terror after bin Laden’s announced death, but bonds have turned around in the face of a rally for crude prices.

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Eurodollar futures – Treasuries yields rose throughout overnight Asian trading and into the European opening. The market was already due for a rest following an 18-basis point decline in yields at the 10-year maturity throughout April, making for its best performance in 15-months. Pre-market equity index futures appeared to assure investors that the news of bin Laden’s death offered fresh impetus to the bull market. A PMI manufacturing reading released later in the New York morning confirmed an expected dip in activity although falling by less than consensus to 60.4 from 61.2. Eurodollar futures have reversed associated losses with implied yields turning marginally lower after the report. The June 10-year note future sits five basis point above its session low and yields 3.29%.

European bond markets – European markets are off to a slow start characterized by extremely light volume. Fixed income prices fell in response to bin Laden’s death on grounds of diminishing need for the safety of government paper. Losses accelerated following the release of a Eurozone-wide pick-up in manufacturing according to the April purchasing managers index, which in the event rose to 58.0 from 57.7. The expansion did continue at the heart of French and German manufacturers but wore thin at the edges such as in Italy where activity did dip highlighting the plight of the periphery. June bunds have subsequently risen away from a 122.51 session low to stand at 122.75 with the yield higher at 2.25%. Euribor contracts continue to nurse losses of three pips on the day.

British gilts – British markets remain closed for a public holiday.

Japanese bonds – Japanese government bond yields nudged to a six-week low at 1.195% as onlookers observed the extent of the slowdown and judged that the Bank of Japan might further extend monetary easing. The government meanwhile approved a ¥4 trillion ($49 billion) budget to help start rebuilding its shattered economy following the twin ravages of earthquake and tsunami. The June JGB futures contract added 15 ticks to close the session at 140.20 after a report showed the first decline in Japanese wages in 13-months. Year-on-year wages slipped by 0.4% according to today’s government report. Elsewhere the already evident disruption to the local economy was evidenced by a 51% annualized dip in vehicle sales throughout April.

Canadian bills – Canadian markets remain constrained by Monday’s election, which should deliver victory for Richard Harper’s Conservative party but has also seen the rise of a pro-union New Democratic Party, which could yet provide some teething-pains after the ballots are counted. In today’s economic data industrial production costs rose by 0.9% during March while raw material prices surged by 5.7%. In both cases previously recorded data was boosted by revision keeping fixed income markets still wary of yet tighter monetary policy from the Bank of Canada. While short-dated 90-day bill futures remain marginally lower following the data, government bonds have suddenly turned higher on the day to yield 3.20%.

Australian bills – The Reserve Bank of Australia is unlikely to lift interest rates at its scheduled Tuesday meeting although the improved attitude to risk helped weigh on 90-day bill futures in Sydney. Implied yields rose by five basis points heading in to the meeting. Dealers don’t readily see much near-term upside for rates and rather expect the RBA to tie its monetary policy bow for rates in the third or final quarter. Government bond yields added two basis points to close at 5.42%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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