Bond demand lifted by ISM weakness

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

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.

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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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