British gilts – Gilt traders drove the June contract to within 20 ticks of its weekly high heading into the official close and sending the 10-year yield south to 3.36%. The Institute of Fiscal Studies in its report on British living standards highlighted consumers increasing discomfort. With inflation exceeding income growth and government spending cuts overshadowing welfare payments, the IFS showed that earnings in real-terms were 3.8% lower in the 11 months through February. The Bank of England could worsen the situation should it choose to respond to inflation driven largely by government tax increases and higher energy costs. This week the Bank warned that this year inflation might return to 5%, but it continues to appear to be buying time against raising interest rates. Short sterling futures mustered a tiny rally.
Canadian bills – The benchmark government bond yield softened in response to a half-point rally in U.S. treasuries although domestic yields failed to fully match the five basis point slip in American debt. Tame U.S. inflation data arguably diffuses the plot to raise Canadian interest rates and as such was reflected in a three point rally in 90-day bill prices. Government bond futures advanced by 45-ticks to 122.63 as its yield dipped to 3.19% leaving local debt two pips above comparable U.S. treasury notes.
Australian bills – Weaker Asian stocks helped underpin positive sentiment across the 90-day bill futures strip where implied yields eased by a further point. The mood improved earlier in the week after the government revealed a net loss of jobs for April creating debate over the prospects for the regular economy outside of a booming mining sector where demand for new hires remains strong. Aussie government bond prices were unchanged leaving the benchmark 10-year yield at 5.35%.
Japanese bonds –Despite a 32% year-on-year gain in machinery tool orders during April, dealers continue to take the view that economic recovery is likely to remain elusive or at least that it will be a long, hard slog in light of the earthquake and ensuing devastation. Japanese 10-year yields eased marginally and remain sticky at the lowest of 2011 closing at 1.106% after the June JGB future rose by five ticks to 140.78.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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