Minting new phrases such as “reprofile” to float the idea of a solution to the problematic health of peripheral European governments’ debt misses the point that none of the previously floated solutions appear to be long-lasting. Fatigue among investors hanging on in vain for positive news out of Brussels appeared to be playing a role in driving government bond yields to the lowest in 2011. Tepid U.S. data added to rising demand for the safety of Treasuries regardless of the ugly state of America’s fiscal tower.
Eurodollar futures – Capacity utilization dipped a smidgeon while industrial production ran at the same pace during April as it had the month before. Investors had hoped for a string of advances stretching back to November but perhaps rising energy and raw material costs dampened enthusiasm across this sector too. Stocks retreated sharply by lunchtime leaving buyers to corner the bond market sending the June future to a fresh high for the move to 123-05 forcing yields to a 2011 low at 3.11%. The tone was set earlier by deterioration in the housing market when new housing starts slid 10% with the horizon looking no better with news of a 4% slip in building permits. Eurodollar futures advanced by increasing amounts across the maturity spectrum. The implied yield at the March 2012 expiration eased by one pip to 0.52% while that on the March 2013 contract eased by five pips to 1.52%.
European bond markets– German bund bears were forced to throw in the towel toward the close of European markets as North American markets built a head of steam. The June contract was lower in the morning after a German measure of consumer confidence rose. The Zew index of current sentiment rose from 87.1 to 91.5 indicating a robust climate for consumers and workers. However, an index measuring the likely performance of activity six months ahead crashed from 7.6 to 3.1 and offered an olive branch to the bond bulls. The June contract joined in the fixed income march forward with the contract reaching a session high to 124.48 where the yield eased to 3.10%. Euribor futures made headway of three basis points as implied yields softened from an earlier rise on the day.
British gilts – Gilt futures expiring in June reached a session low at 119.96 following acceleration in consumer price pressures. The ONS said the pace of inflation reached its fastest in three years during April forging ahead to 4.5% after having already reached twice the Bank of England’s 2% ceiling last month. Indeed the March data earlier softened unexpectedly. The Bank recently forecast a possible 2011 resurrection for consumer prices to 5% prompting some to figure an imminent rate increase might be in the hopper. June gilts later shrugged off the report figuring that economic weakness would defuse the inflation argument causing the Bank to rest on its laurels for as long as possible. Short sterling futures look set to close the session with a minor loss of just one basis point across the strip having staged a neat rally from an eight basis point decline after today’s price report.
Canadian bills – Sliding equity prices continue to weigh on sentiment as investors figure the recent pause in activity will take away any central bankers’ desire to tackle inflation when output data is starting to soften. A strong Monday performance by U.S. debt saw a decline in yields outpace that on Canadian debt and while Tuesday’s race remains neck-and-neck, the yield differential between the two has Canadian debt yielding four pips more than comparable treasuries with the 10-year yielding 3.15%. Ninety-day bill futures also rallied as monetary tightening expectations softened. The December 2011 contract advanced sending its implied yield lower to 1.67%. This contract has outperformed its Eurodollar counterpart by seven basis points in less than a week as fragility among investors has firmed.
Australian bills – There was very little response in the Aussie yield curve to the release of minutes from the May Reserve Bank meeting. Investors already knew that the Bank’s officials had developed a bias to tightening at least one more time should the exchange rate not ward off inflation from taking a deeper hold. However, for now, it could be claimed that a robust Aussie dollar is cramping inflation’s style and that has the market undecided between one or two further quarter-point moves from the RBA. Bill futures hardly budged on such a cloudy outlook, although the benchmark government bond added one basis point in yield to close at 5.575%.
Japanese bonds – A recovery in stocks on Tuesday and a notably weaker yen sapped demand for the safety of government bonds. Five-year bonds also suffered from pre-auction stresses as dealers acted to soften prices in advance of a government auction later in the week. June JGB futures shed 23 ticks to close at 140.47 sending the yield up to 1.14%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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