Despite a couple of days of losses for key global commodity markets, bond traders seemed to be in no hurry to get into the groove midweek to pick-up the running. Yields were marginally higher ahead of a key reading of the pulse of the U.S. service sector in what many see as an acid test for consumers’ ability to weather surging gasoline costs at a time when food prices are also stealing from take home pay. In the event a slide in the ISM non-manufacturing index slapped stocks and commodities for another day and provided a fillip to demand for bonds.
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Eurodollar futures – It took a slide in the April ISM index for non-manufacturing towards standstill to really draw out bond buyers midweek after wisdom-defying gains for bond prices had earlier sent yields to the lowest in four months. The ISM reading of 52.8 was well short of an expected 57.3 and alarmingly close to the breakeven reading of 50 indicating neither expansion nor contraction. June Treasury notes rallied having first tested the base of a two-week old rising channel of support, with the contract reaching 121-23 pushing the yield down to 3.22%. Bond buyers’ appetite has dried up recently after a strong run, but still they come after signs that what the Fed calls a ‘tenuous’ recovery is accompanied by tepid inflation data, which the Fed seems to believe is merely transitory in nature. Eurodollar futures also turned around leaving session losses behind after the ISM reading disappointed. An earlier ADP report showed that employers hired fewer newer workers during April than the prior month also adding to economic concerns.
European bond markets – German bunds spiked following weaker reading for service sector activity in the world’s largest economy. But there is no hiding the market’s bigger fears that the ECB will continue to set monetary policy according to domestic inflation concerns where the term ‘transitory’ doesn’t appear to translate at all well in to German. This week the German/U.S. 10-year yield curve crossed with declining Treasury yields falling through those on German bunds for the first time since June 2009. That picture played out further today widening to six basis points consistent with the expectations that the central bank’s policy of tightening monetary conditions is not yet over. PMI data for the Eurozone did dip during April driven by weaker activity in the Eurozone’s Franco-German heartland, but by nowhere near as much as what we saw in today’s U.S. data. Euribor futures remained down and out facing losses of seven basis points just in case Thursday’s Helsinki-ECB meeting unexpectedly reveals a second quarter-point lift in rates.
British gilts – The British yield curve faced quite the maelstrom midweek with cooler economic data meeting with the hot-air circumvented by analysts’ opinion at agent provocateur, S&P. The agency said that it was highly likely that the Bank of England would need to lift interest rates within the next three months. The May meeting announcement is due on Thursday. S&P said that despite an April reprieve for consumer prices after four months of barnstormingly bad inflation data, it expects a resumption of the core trend to lift CPI back above 5% in the third quarter. The credit market took the S&P warning squarely on the chin and despite lackluster housing, money and lending data sets released earlier in the day. Short sterling futures sank by five or six basis points as fears swept the market that dealers acted prematurely in leaning heavily on yields in April. The yield on the 10-year gilt reversed course easing by two basis points to 3.4% following the ISM data from the far-side of the pond with the June gilt rallying by 50 ticks from the session low to 119.91.
Canadian bills – Canadian bond prices had little choice but to rally after the weaker U.S. services data in order to maintain the 10-basis point spread between the two nations’ 10-year debt yields. Following on from the decisive Conservative party victory at Monday’s election bond buyers continue to think positively on the outlook for Canadian government finances and growth. With an expected growth rate at least as strong as that of its Southern neighbor and leading its G7 cohorts, Canadian bonds are a better bet than most given the mandate to balance the budget within three years. Bill futures rallied by four basis points from session lows as North American stocks responded negatively to the weaker ISM report.
Australian bills – Government bond yields declined by four basis points to 5.39% despite the first expansion in the services sector since October and a rise in the sector’s employment index to the strongest in seven years. The Australian Industry Group’s performance of services index rose to 51.5 in April from 46.5. The RBA has maintained its monetary stance not least on account of cyclone and flooding damage over summer months. Bill prices soured somewhat in light of midweek data including a report showing a 4.3% increase in new home sales during March. Implied yields added three basis points during the session.
Japanese bonds – Markets closed.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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