A setback for the recently improving U.S. jobs market and a far more cautious approach to European monetary policy setting set government bond trading alight on Thursday helping propel yields lower. Various Federal Reserve members have stepped up a message warning investors that the economic recovery remains modest. And while we could entertain that philosophy without central bank or government intervention during normal times, the reality is that the Fed is fast-approaching the final days of its policy of massaging yields lower. Once again a seed of doubt is growing in the minds of investors who wonder how well or otherwise the economy might withstand a stimulus-free environment in less than two-months’ time.
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Eurodollar futures – Midweek weakness in the ADP report was coated with precursory warning over the health of U.S. employment in the form of the highest reading for initial claims since August. The rise of 474,000 initial claims in Thursday’s report left few bond traders wanting to head into Friday’s official non-farm payroll report short. Benchmark yields tumbled to 3.19% and within a handful of basis points of the low for yields inspired by the events at the Fukushima power plant. Dennis Lockhart of the Atlanta Fed warned that it would take three years to restore the health of the labor market to pre-crisis levels, while cohorts from San Francisco and Boston aid that the Fed was failing to promote full employment. Bond traders are perplexed by the ongoing drip-lower for yields because the economy has recently shown strong signs of better health. Eurodollar futures pushed forward by two basis points as the curve shifted lower in parallel out as far as the 10-year maturity. The 30-year Treasury bond advanced for a sixth day, which would create its longest-winning streak since December 2008 in the aftermath of a financial meltdown.
European bond markets – The ECB appeared to sidestep an early summer rate increase in coded-fashion as investors responded to President Trichet’s change of wording. At the post-meeting press conference Trichet steered away from the use of a need to remain “strongly vigilant,” opting for a need to monitor inflation “very closely” instead. “We continue to see upward pressure on overall inflation, mainly owing to energy and commodity prices,” Trichet said today. “It is essential that recent price developments do not give rise to broad-based inflationary pressures.” Don’t be surprised if his colleagues follow-up in the coming days and weeks with comments suggestive of the imminent need to tighten policy. For now, however, investors focused on the short-end of the curve lapping up both euribor and the two-year schatz contracts helping remove downward pressure on bonds that has recently lifted yields to the highest in 29 months. Euribor futures advanced by 16 basis points while the two-year yield sank by 12 basis points to 1.78%. The June bund future saw gains accelerate leaving the contract 56 ticks higher on the session trading at 123.04.
British gilts – The Bank of England left its policy unchanged on Thursday although the latest economic projections won’t be revealed until the middle of next week. Gilt prices for the contract expiring in June have failed to maintain today’s push higher and the contract is currently lower at 120.14 yielding 3.38%. Yields have nevertheless swooned during the past couple of weeks in light of a dip in inflation and a slowdown in growth with most investors in agreement that the economy is only just starting to respond to the tip of the budgetary iceberg. Short sterling prices have also reversed early losses following changing sentiment in the U.S. and German markets. An earlier report in the U.K. revealed further weakness in the service sector corroborating patterns for manufacturing and construction.
Canadian bills – Following a strong midweek-run for treasuries, Canadian bonds are facing a hard-time matching gains. The Canadian economy is in fine fettle and this week’s election has bettered the prospects for achieving a balanced budget on account of the mandate provided through majority support for Stephen Harper’s Conservative government. The slump in the U.S. 10-year yield to 3.19% on economic concerns has not translated into such a decline north of the border where yields have run aground at 3.18%. The spread between the two has narrowed from over 10-basis points earlier in the week as concerns mount for the future health of the American economy. Implied yields on 90-day bills of acceptance futures contracts eased by four basis as dealers toned down expectations for further Bank of Canada monetary tightening. As crude and metals prices come tumbling down, inflationary threats also ease and so remove a further hurdle for central bankers worldwide in their war on inflation.
Australian bills – Bill prices gained up to six ticks on Thursday as fixed income buyers looked through a strong building approvals report and aimed at the jugular after a retail sales report prompted a reassessment of first quarter GDP. The chances of a further rate increase were already on the wane this week after the Reserve Bank warned over a cautious consumer, scared to either spend or borrow. The 0.5% drop in March retail sales was the opposite outcome the market had expected as department stores saw sales slump 3% while food sales slipped 0.4%. Only clothing and footwear made any headway. Government bond prices advanced sending the benchmark 1-year yield lower to 5.35%.
Japanese bonds – Markets closed.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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