Sliding crude oil prices and a turn in the euphoric tide lifting equities prompted a mid-morning lift for government debt prices midweek. Yields subsequently remain close to the recent floor even after commodity buyers plundered offers after the worst performance in three years forcing a rebound not only in inflation-bearing raw materials, but in confidence surrounding the global recovery.
Eurodollar futures – Nevertheless traders continue to look for signs that yields are overstaying a welcome toward the lowest this year. MBA mortgage application data released today showed that homeowners took advantage of the lowest loan rates this year to refinance debt, while new mortgages also showed signs of life. The yield on benchmark 10-year notes in the U.S. had edged higher late Tuesday in response to a strong performance in riskier assets such as stocks and commodities. However, a slump in crude prices unwound fears of a reflation trade that would create a negative tone for bonds. June notes recently traded at 121-28 for a loss of seven ticks on Wednesday. Eurodollars have halved earlier losses of four basis points as implied yields test the recent break above November highs. Tens today yield 3.21%.
European bond markets –April consumer price data for the Eurozone matched forecast rising by 0.2% for a 2.4% annual gain. The harmonized reading was a tad higher than forecast while wholesale prices behaved far better than during March to leave an annual pace of increase running at 9.2% after a previous reading of 10.9%. June bunds had earlier leaned on the data as excuse enough to test a recent positive string of gains and reached a low at 123.58. Lately the contract has put in a session high after yields gained by five basis points on the day proving attractive to some. The contract reached 123.98 before paring gains to 123.82. German bunds also rose in appeal as the euro weakened in response to worries that Greece has little alternative but to default on some of its debt. Market participants are primed for breaking news of a second financial aid package for Greece.
British gilts – Gilts slumped in response to an awkward message from the Bank of England in its May inflation report - a four-times a year update on growth and price projections. The Bank warned that inflation would soon assault 5% before 2011 ends and even if it followed the market’s interest rate trajectory it would still more likely than not leave inflation above 2% through the end of 2012. Two-year gilt yields added five basis points to stand at 1.06% while 10-year yields at one point added up to eight pips. Prices have subsequently recovered keeping the yield at 3.44%. Short sterling felt the crushing force of the bear’s claw with accelerating losses across deferred contracts. The yield on the contract expiring March 2012 added eight basis points to 1.31% while the December 2012 expiration implies a yield of 2.03% and is 11 basis points higher than on Tuesday.
Canadian bills – Canadian government bonds spent a second day above U.S. treasuries although the yield spread narrowed to just three basis points. Implied three-month yields rose by a single basis point according to bills of acceptance futures in Montreal. A trade report was unlikely to budge economic expectations in the morning session and bill futures took their cue from Eurodollars nursing minor losses.
Australian bills – The Australian dollar was higher overnight and stocks across the region rose as the recent commodity price rebound helped spur further interest in riskier bets. Dealers ignored the net-tightening announced the day before in the annual budget, which had sparked a decent rally for short-end bill futures. On Wednesday those futures price gains were unwound with implied yields gaining two or three basis points. The closing yield on the Aussie 10-year government bond was 5.43% where sellers forced yields three pips higher on the return of risk appetite.
Japanese bonds –Japanese 10-year bond futures expiring in June settled one tick lower at 140.65 although cash yields were pushed lower by one basis point to 1.112% following a decline in Japan’s leading indicator. The index fell from 104 to 99.5 using latest March data, which includes machine tool orders and business inventories. Bonds continue to offer solace to domestic investors as the challenge of rebuilding the economy looms large.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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