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.