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.
Canadian bills – Mixed data for the Canadian economy left credit markets turning to U.S. markets for direction. Leading indicators compiled using April data rose a little more than expected with a 0.8% gain. Data for the previous month was revised lower taking some of the wind out of the sales of a better April showing. A separate report showed wholesale sales improved by far less than anticipated ahead of the data. The March reading showed a slight gain of just 0.1% when analysts’ forecasts called for a jump of 1.2%. A previous dip was also revised marginally higher. While official G7 inflation projections have not yet been revised lower, investors at least are breathing softer in light of a slide for raw materials. This is showing up in outperformance of the Canadian short end whereby 90-day bill futures have felt less fallout from weakness across comparable Eurodollars.
Australian bills – A first quarter report showing a weakening in the pace of wage pressures set a softer tone to interest rate expectations midweek. Dealers had expected acceleration from a previous pace of 1% for the wage cost index in the fourth quarter but were pleasantly surprised by a dip to a pace of 0.8%. The report is a positive development from the perspective of the central bank who recently continued to warn that monetary policy would likely have to rise from its comfortable 4.75% if inflation starts to develop signs of worsening. Today’s report depicts a well-behaved labor market. A separate report showed fewer skilled vacancies according to a DEWR survey with a decline in the number of positions reportedly available in May. The report also wiped out the increase reported last month indicating a worsening in labor market health. Short-dated bill futures saw implied yields decline by up to five basis points as dealers felt the reports would allow them to pare interest rate expectations. Government bond yields also responded with a two pip decline to 5.33%.
Japanese bonds – The Japanese 10-20-year yield curve widened out a notch or two as regional stock markets reversed losses experienced earlier in the week. The June 10-year JGB future closed with a minor gain of seven ticks to 140.67 while its yield remained unchanged at 1.14%. A service sector index showed weakness and dipped by 6% although since the data is from the disastrous month of March, investors overlooked the reading.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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