British gilts – British yields gapped lower in line with gains in core-European bond prices. Bank of England Chief Economist Spencer Dale told the Financial Times over the weekend that his main concern is for the nasty path inflation appears to be taking, more so than being concerned that the recovery hasn’t gained traction. Yet in today’s market few seem to heed his call for tighter monetary policy as investors buy short-sterling futures causing a nine basis point decline in implied yields. June gilts had pared gains to 121.23 from an opening advance to 123.47 and appear to be setting up for a test of the session low at 121.16 beneath which an opening gap must at some point come under the microscope down to 120.92.
Australian bills – The weekend’s election results building in Spain helped bow Pacific and Asian stock markets while the real buckling came after news broke out of China that the manufacturing sector was suffering under the weight of government measures to cool the economy. An HSBC manufacturing PMI showed the sector slowed to an index reading of 51.1 from April’s 51.8. That’s hardly comforting for miners and manufacturers in Australia who view China as its biggest customer. In the face of mounting global risk aversion government bond prices advanced lopping six pips off the benchmark 10-year yield, which slumped to 5.25% or 50 pips over where the Reserve Bank maintains its short-term benchmark at present. Dealers reduced bets that the central bank would need to raise interest rates again and drove down implied yields by seven pips.
Japanese bonds – Japanese government bond futures expiring in June rose by 10 ticks to settle at 140.92 although some fear that the wind beneath the wings is fading. With a key 20-year issue due for auction this week dealers sold cash bonds despite the 1.5% slide in the value of the Nikkei as risk aversion reared its head.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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