Bond market advances as fear creeps higher

Core European government bonds bucked an otherwise broader decline in yields around the globe inspired by rising tensions after bin Laden’s death. Equity prices declined alongside those of leading commodities, partially inspired by weakness in Chinese and U.S. manufacturing trends. Americans have been warned to be extra-vigilant at this time and for now there is a broader sense of fear over recrimination that has bond-buyers with the upper hand.

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Eurodollar futures – Twelve-month bill yields fell to their lowest since 1959 records began according to Bloomberg data after the U.S. reduced short-term debt sales. And with no signs on the horizon that the prevailing regime of ultra-loose monetary policy is set to change, Treasury prices continue to advance sending yields down across the curve. The 10-year yield slipped to 3.26% ahead of a March reading for factory orders expected to show a rebound over earlier data. Eurodollar futures advanced as the implied forward curve eased by a couple of basis points.

European bond markets – German yields remain caught-up in the ECB’s maelstrom of monetary tightening with the bund yield advancing by one basis point Tuesday to 3.26%. The June 10-year contract erased earlier losses to stand at 122.77, marginally lower ahead of U.S. data, having recently being squeezed into the green on the day. The ECB meets this Thursday in Helsinki to decide whether to add to its recent quarter-point increase, although the hot-money is on a June increase. The incessant pressure on the yield curve has caused a rise in two-year yields to its highest point in two weeks. Pressure remained following a marginal pick-up in the pace of Eurozone producer price inflation during March according to a report today. The annual pace of increase rose to a 6.7% pace for its highest reading since September 2008 and shortly after crude oil prices surged to a record.

British gilts – Two-year British government debt yields fell through the floor Tuesday following a sharp slowdown in manufacturing activity. The April PMI slumped unexpectedly to 54.6 as it hurtled towards a standstill at the 50-line in the face of stringent budget measures aimed at reducing a gaping fiscal shortfall. Today’s news tripped up bank rate-increase hopefuls woefully short as short sterling prices screeched higher. Implied three-month yields tumbled by around 12 basis points while the two-year yield toppled by 15 basis points as dealers locked into yields hoping for a Bank increase soon. Such hopes were squashed today. The June gilt contract added 54 ticks lopping just two basis points off the 10-year benchmark yield to 3.42%.

Canadian bills – Canadian bond prices reached for the sky outpacing gains made by U.S. treasuries and following a decisive Conservative party election after Monday’s elections. The 10-year yield slipped by five basis points to 3.15% as the June future added 42 ticks to 121.97. Meanwhile bills of acceptance futures added a couple of points as the curve shifted lower.

Australian bills – The Reserve Bank of Australia maintained its short-term interest rate at 4.75%, phrasing its stance as “mildly restrictive.” The chance of a September-time rate increase eased to 52% after the central bank warned that it might “exert additional restraint” on some corners of the export market. Bill prices advanced by a couple of basis points while the benchmark 10-year yield remained unchanged at 5.40%.

Japanese bonds – Markets closed.

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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