June Treasury notes recaptured fresh contract highs following a downbeat reassessment of the health of the world’s leading economy during the first-quarter. European yields followed suit inspired by earlier hopes that Asian investors would dare to step to shore up the fiscal shortfalls resulting from overspending and a deep financial crisis.
Eurodollar futures – The second reading of GDP for the first three months of the year failed to improve on a 1.8% expansion, cooler than rip-roaring 3.1% pace that instilled confidence at the end of 2010. The disappointment was deeper given a downgrade to personal consumption, which had been reported to show a 2.7% pace earlier but fell short of an upwards revision, cooling instead to 2.2%. Given the 70% reliance on consumption to foster growth and given the future implications of forecasts for unemployment to remain elevated, credit markets were disappointed by today’s reading. Yields fell back to 2011 lows at 3.10% with the June note futures contract reaching 123-17. Deferred maturities in the Eurodollar complex added up to six basis points as the entire curve softened its stance on monetary policy expectations.
European bond markets – The positive environment for yields courtesy of weakening U.S. growth prospects helped provided additional boost to German bunds Thursday. The yield on the benchmark 10-year contract slid by three basis points back to year-to-date lows at 3.01% as the June future reached 125.48. An earlier report showed a slip in the pace of increase of import prices facing German producers. The April report showed a fall from a monthly 1.1% pace of growth to 0.3% leaving import prices higher on the year by 9.4% compared to 11.3% last month. The EFSF chief argued that demand would continue from Asian and particularly Chinese investors for bailout bonds issued by the unit on behalf of the government of Portugal. Euribor futures advanced bucking midweek declines.
Canadian bills – Aside from the U.S.GDP report, more worrying labor market data undermined confidence in the health of North American economies. The weaker is Canada’s main export market, the lesser the likelihood that the Bank of Canada will revert to further monetary tightening. A rise of 10,000 in weekly initial claims to 424,000 was not what bullish onlookers had wanted to see. Canadian money market dealers continued to push down the prospect of more interest rate increases and sent implied yields on bills of acceptance lower by seven basis points as the market moves to new low yields for this move. The December BA contract last implied a yield of 1.52% in October 2010 before the central bank resumed its tightening process. Since that point the implied yield surged to 2.25% towards the end of the year as dealers discounted far more tightening than has subsequently been applied. Spreads over comparable short-end U.S. yields have also continued to narrow with the distance between the pair of December contracts today reaching 110 basis points from 140 pips during the space of just two weeks.
British gilts – Short sterling has bucked the global trend towards lower yields on Thursday despite a GfK consumer confidence report for April showing a still despondent consumer. The -31 reading reported earlier matched the April reading as if we need more confirmation that a squeeze on income and rising taxes is challenging consumers. Short sterling prices dipped by a couple of basis points while the yield on the benchmark 10-year gilt softened by one pip to 3.31%.
Australian bills – Bill prices slipped by a couple of basis points sending expectations for the full amount of monetary policy tightening over the next 12 months back up to 25 basis points. Deputy Governor Ric Battellino at the Reserve spoke of a “very strong global economy” citing strength in the domestic exchange rate as evidence of still strong demand for Aussie resources. Benchmark government bond yields caught up with recent declines in global government bond yields falling by three basis points to 5.25%.
Japanese bonds – June JGBs crashed by 31 ticks overnight sending the contract tumbling to 140.58 by the close. The mood in government bonds was far more somber given a rally in commodity price and resurgent equity prices. Overnight the Nikkei jumped by 1.5%. Twenty-year bonds did rally after an auction met with better demand than anticipated, leading the maturity to a third daily gain. The yield on the 10-year bond recoiled from its weakest since November 24 adding two basis points to 1.135%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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