Risk aversion trade support bonds

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.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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