IB Interest Rate Brief: Lack of compromise for Greece sparks more risk aversion
Treasury notes have had a big week and performed the task of 10 men in leading the lurch lower in global yields, finding modest additional support on Friday in a surging dollar index. The yield curve dipped Wednesday to its lowest this year set against a hint that the Fed is still nowhere near reaching for the door handle at the exit despite discussing the steps it now intends to make the journey. Rising tensions across the Atlantic and a downbeat outlook from the Bundesbank helped European bond markets advance to their best levels of the week. The foaming data and cooling-off in commodities has impacted a variety of key generic spreads by the weekend.
Eurodollar futures – Having performed the early running for government yields this week, Treasury notes are ending lower on the week but certainly not at their weakest. The June future is higher by six ticks at 122-25 Friday forcing yields down by just one pip to 3.16%.
European bond markets –Rising tensions over the inevitability of a Greek restructuring have etched their hallmark on bond trading Friday. Few can see a way out at this juncture as Greece struggles to make inroads in reducing its deficit. The ECB threw down its gauntlet Thursday by hailing any change in its outstanding debt profile as unworkable and threatened to refuse Greek paper as acceptable collateral. The brick wall now facing Greece seems both insurmountable and too wide to step around and on Friday caused yields to jump equally as high as fresh record borrowing costs hit the Greek market. German bunds were forced into retreat partially in response to the rising risk aversion tone, but also due to the Bundesbank’s monthly report, which stated outright that the first quarter growth rate of 1.6% was unsustainable and was likely padded by a catch-up for inventories. It forecast worse conditions ahead and money market players jumped on the likely dip in output to assume a lower forward likelihood that the ECB will raise rates. The 10-year German yield slid by five pips widening its discount to treasuries to 10 basis points as the June future challenges its contract high at 124.97 into the weekend. Friday’s high is just 14 pips short of there.
Canadian bills – Canadian 10-year yields dipped decisively below the benchmark treasury yield Friday following good news for inflation and bad news for retail sales. The combination left dealers concluding a slimmer chance of a nearby monetary tightening at the Bank of Canada after Governor Carney reinforced earlier this week that any further policy changes would be critically assessed. The Canadian economy has become increasingly reliant on business investment forging ahead, while less reliant on a consumer hindered by a 40% increase in gasoline costs during the last 12 months. Mark Carney told an audience recently that headline inflation would remain above 3% through the second quarter but expects it to fall back to 2% by mid-2012. Today’s data didn’t shake that assessment with monthly inflation benefitting from a reversal in vegetable prices and a general moderation in overall food prices. Gasoline price gains were somewhat offset leaving the index higher by 0.3% for an annual gain of 3.3% and the same as in March. The Bank of Canada’s core CPI index eased by one-tenth to 1.6% year-on-year. Government bond futures surged to a session high at 123.08 lopping five basis points off the yield to 3.15% leaving it lower than U.S. yields one pip higher. Dealers also advanced the BA complex sending year-end implied three-month yields down by nine basis points to 1.61%. That spread relative to the comparable implied yield on December Eurodollars has narrowed to 120 pips from 132 one week ago.
British gilts – Gilt prices are challenging the weekly peak set on Wednesday before the Bank of England released the set of May minutes that caused yields to spike. Friday’s 10-year yield gain has reversed such losses and declined to 3.35% causing its spread to treasuries to narrow from 27 basis points last week to 16 basis points. Should risk aversion continue that spread could compress further towards 10 pips.
Australian bills – The Australian cash market still has 30 basis points of further monetary inbuilt over the next 12 months although dealers continue to chip away at expectations over what the RBA might deliver. Implied yields closed the day virtually unchanged on a data-free session although government bonds made a healthy advance sending the 10-year yield lower by three pips to 5.31%.
Japanese bonds – Japanese government bond buyers hit back hard following a bearish session on Thursday and drove yields down by the most in two weeks to close at 1.12%. A story in the Yomiuri newspaper suggests that the government will double the rate of sales tax to 10% by 2015 although had no firm source to quote. Such a possibility would reduce reliance on bond issuance and was taken as a fundamental positive on the day as yields remain near 2011 lows.
Senior Market Analyst
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