A rally for bonds clearly predicated upon weakening commodity prices and declines for global stocks appears to have hit a brick wall on Wall Street at Monday’s opening bell. Equity prices are no longer lower while the inaugural piece of economic evidence for the week failed to provide deserved further upside for bond prices as yields rebound from the lowest in several weeks.
Eurodollar futures – The Empire state’s manufacturing index fell from April’s strongest reading in a year after surging costs for raw materials provoked a downturn in output. June Treasury note futures nevertheless reversed gains to a session high point at 122-25 to trade at a minor loss on the day trimming a fall in the yield to a minor rise to 3.18%. The health of the national housing market remained in a slump according to an unchanged reading from the NAHB for May. Investors have recently rushed headlong into Treasuries for fear that the economic recovery could be vulnerable to signs that activity is facing a marginal slowdown. The Federal Reserve has also signaled that it is no rush to change its near-zero interest rate policy while Atlanta Chief Dennis Lockhart over the weekend said that it’s still too early to think about leaving monetary stimulus behind. Eurodollars thereby failed to follow the tendency towards higher interest rates set by longer-dated maturities and after both data reports remain higher in price and lower in yield on the day.
European bond markets – In late afternoon trading June bund futures are leading European government bonds lower having been solidly in lower yield territory during the first half of the day. Undoubtedly the lack of follow-through to U.S. equity trading is having some impact and earlier European bonds were unfazed by confirmation of a pick-up in consumer price inflation to a two-year high with investors more concerned about the outcome of a ministerial meeting on further aid for Greece. Euribor futures traded in an earlier advance for three-pip losses as the yield curve shifted up in parallel from three-month to 10-year maturities. German tens moved out to yield 3.12% as the curve shifted in to higher gear.
British gilts – Gilt futures spent the morning building a steady gain for the June contract to 120.82 before the contract swooned to a session loss of about the same amount, stopping at 120.39. The catalyst seems to be a sharp-dip in the U.S. Treasury market. Short sterling futures nevertheless remain at the day’s best prices as implied yields soften by about three pips along the curve. A report from Rightmove indicated the highest asking prices for British homes since 2008 although the Spartan supply of housing has something to do with the calculation and it would be a mistake to interpret the data as an improvement in the housing market.
Canadian bills – Despite a softening in the domestic dollar as commodity prices tumbled again on Monday, dealers seemed to make a beeline for benchmark government paper driving the yield well through the comparable U.S. 10-year yield. However, a back-up in yields saw sellers enter the Canadian market and yields have moved back to par at 3.18%. Shorter-dated 90-day bills of acceptance futures are higher by two basis points along the strip despite a robust reading for manufacturing sales during March where an earlier report showed a monthly gain of 1.9%.
Australian bills – The Aussie yield curve rose by three basis points from short-dated bills all the way out to 10-year government bond maturities where the paper yields 5.38%. The yield curve movement seemed at odds with both the performance of commodity prices and regional equity prices. The data points out on Monday also refute the need to tighten monetary policy sooner making the move look a little at odds. Home lending data fell to a 10-year low, while auto-sales for April reversed a March advance.
Japanese bonds – Government bond prices slipped after an unexpectedly robust reading for machinery orders and despite the March earthquake. Dealers expecting a decline for the data series were pleasantly surprised by a monthly advance of 2.9% and responded by selling June JGB futures, which settled with a 16 tick loss to 140.66 as the 10-year yield rose to 1.12%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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