Bonds higher but captivated by equity gyrations

The pre-market prediction of a deeper collapse for equities has failed to take grip after retail sales pacified bulls who see falling prices as reason to pick off some bargains. Bond prices have therefore come back off the session’s highs and have even toyed with the notion of a down day for U.S. government paper. Signs of a downturn in the European manufacturing sector helped restore demand for the safety of government bonds coincident with further discussion on what can be done to help Greece.

Eurodollar futures – April retail sales data rose slightly less than expected with a 0.5% gain while a March gain was revised to twice its initially reported pace. Sales were boosted by what we spend at gasoline stations where the average per gallon price rose to $3.81 from $3.54 during March. Excluding this conspicuous bump up for consumption sales rose a far more modest 0.2% leaving them 2.1% higher over a year ago. On this measure consumption isn’t quite dead, while another report showing a fifth-straight reading for initial claims above 400,000 confirmed the Fed’s moderate language surrounding the health of the labor market. June Treasury note futures have remained within a narrow range despite today’s plethora of data, which also included a higher than forecast producer price index. Yields nevertheless have thus far retained a decline on the session to 3.17% while 90-day Eurodollar futures have seen implied yields dip by one tick.

European bond markets– What to do with Greece: Let it default or throw more money at it? German Finance Minister Wolfgang Schaeuble towed the party line saying today that it needs to make further savings before it could qualify for more aid from its partners. National unions closed the country in another well-orchestrated strike in protest at government austerity measures. The downturn in risk appetite and a contraction for the zone’s industrial output during March slammed the brakes further on notions that the ECB can muster a further hike in interest rates over the summer. Euribor futures made healthy gains of four ticks along the strip in response to rising tensions. Greek yields surged once again, forcing buyers into the safety of German paper where the four basis point dip in the 10-year yield to 3.09% means yields are within two basis points of the lowest reading since mid-March. June bunds reached 124.49 at the session high before paring gains to trade at 124.27.

British gilts – Fixed income traders bought gilts like there was no tomorrow unwinding the response to yesterday’s warning from the Bank of England that inflation is likely to rise. Yields rose sharply in response to what many interpreted to mean an imminent rate increase. However, March data showed a sharp shortfall in industrial production left output up 0.7% year-over-year. Manufacturers rebounded from a flat February expanding production by a mere 0.2% during March leaving output higher 2.7% year-on-year. In February the annual pace of gain was running at 4.9%. Investors clamored for yield as commodities, equities and data all pointed in the same direction. June gilt futures traded 52 ticks higher to 120.45 having earlier reached 120.70. The yield slid seven basis points to 3.36% while two-year yields tumbled by five pips to 0.99%. Short sterling futures made a good stab at reversing Wednesday’s pessimism sending implied yields lower by seven basis points.

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