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.