Bond buyers drawn by sliding equities

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

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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