Bonds take cautious view of risk recovery

A fading rebound for risk is having remarkably little impact on Treasury yields on Tuesday, although bond prices remain in the red. Commodity prices are on the rebound with crude oil futures feeling the full force of a Goldman Sachs “buy” along with other key commodities whose values have slumped on account of a bursting of growth hopes. The low yield environment that follows on from a popping of the commodity bubble is unlikely to make a sharp exit with investors more likely to retain an eye on this built-in health indicator going forward.

European bond markets – Euribor futures are marginally lower implying a slight uptick in yields. However, very little has changed in terms of the reining in of investors’ fears over sovereign debt. An earlier bubbly reading for German investor confidence set a darker tone for German bund prices sending yields into retreat from a four-month low. Yet Portuguese benchmark yields today rose to the highest level since the euro was formed in 1999, while a warning over a possible downgrade from Fitch for Belgian debt keeps investors’ nerves jangling. June bunds recently slipped to a session low at 124.71 lifting the 10-year yield to 3.06%.

Eurodollar futures – Eurodollar futures are barely changed and reflect either higher or lower implieds depending on how far you care to peruse down the strip. Short-end yields are a tad lower while yields along the 2013 strip have risen by a couple of basis points. There was little response to a firming in new home sales during April where an 8% increase lifted the annual pace to 323,000. Nevertheless there was scant cause for jubilation given that sales fell 23.1% from the end of last year’s tax-break for new home buyers. I think it remains pretty clear that the bleeding in the sector hasn’t yet abated in light of last week’s news that 37% of overall sales during April were forced. It therefore seems understandable that June notes are paying little attention to the data and have pared session losses to just two ticks where they stand at 122-30.

Canadian bills – Traders returning from a domestic holiday bought 90-day bill futures sending the December contract to its highest price since March 16 in the midst of the Japanese tsunami crisis. Traders have pared bets on the timing and extent of ongoing Bank of Canada monetary tightening as global activity has cooled somewhat and commodity prices at least partially removed inflationary pressures. Governor Carney has promised to adopt a cautious tone in considering further rate increases while his deputy Timothy Lane warned last week that the global financial system remains under threat even several years after the credit crisis owing to weakness in balance sheets and a prolonged era of lax monetary policy that might spur risky investment practices. June government bond futures are unchanged following a long weekend and recently traded at 123.01 to yield 3.12%.

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