Bonds run out of steam ahead of FOMC minutes

Rather than asking whether commodity and equity prices would recover, investors earlier kept their powder dry and made a beeline for the safety of government bonds again Wednesday depressing yields to the lowest so far in 2011. But as the morning wears on those who bought on the crest of this latest wave are left wondering if they haven’t been handed the bag as treasury prices slip to their lowest of the day on very little news.

Eurodollar futures – The capacity of FOMC minutes to shift interest rate expectations is typically high. But since Fed Chief Bernanke held the first-ever press conference immediately after the April 26-27 policy meeting it’s unlikely that there will be further fireworks when official minutes are released Wednesday. The benchmark 10-year yield traded to as low as 3.09% despite a desperate attempt at a rally on Wall Street encouraged by recovering prices for crude oil futures. Eurodollar futures have slipped by around four basis points as traders are primed with practically all they need to know ahead of the release of April minutes this afternoon. The economy requires monetary stimulus, while additional stimulus is unlikely on account of the need to contain inflation. Yet some of the whiff of inflation has dispersed on account of a collapse in commodity prices leaving the path clear for steady monetary policy for as far as the eye can see. The advance to Tuesday’s highest point in the June 10-year futures contract failed to see follow-through buying and has given way to near-term disappointment. The contract subsequently fell to 122-22 on the day.

European bond markets – After a weaker start June bunds managed to climb into positive territory reaching a high at 124.50 following a less robust construction output report for March. A decline of 0.3% translated into an annual pace of decline of 4.9%. Softness exhibited across the treasury complex forced some investors to pare holdings and the contract reached 124.32 yet still above morning lows. Concern remains the watchword around Europe with the ECB today ruling out the plausibility of a restructuring for Greek debt with council member Juergen Stark concluding that such an event “would be a catastrophe.” Political will still argues for reprofiling in combination with draconian spending cuts. Euribor futures surrendered a couple of basis points on Wednesday.

British gilts – Implied yields moved little in response to two reports Wednesday. The most important was the release of the May MPC minutes at which the split remained 6-3 in favor of maintaining stable monetary policy. The tone to the minutes appeared slightly more dovish with one comment seemingly warning that consumers and businesses couldn’t bear the strain of tighter policy. The second report showed a net 12,400 increase in jobless claims in April forcing up the claimant count to 4.6%. Short-dated futures were unchanged for most of the morning and only weakened when Eurodollar selling picked up ahead of FOMC minutes. Gilt futures expiring in June rallied in immediate response to deterioration in the labor market adding a net 25 ticks to 124.94 at the session high. Weaker U.S. bonds saw British government futures decline to a net loss at 124.66 by mid-New York morning.

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