Euro bonds rally: Are Greek's cheaters?

IB Interest Rate Brief: Feint growth catapults bonds

The week is ending on an upbeat note with pre-market equity index futures hinting that investors are cautiously upbeat about earnings and economic prospects ahead of the official start of summer in the U.S. Nevertheless, rising equity prices to end the week coincide with a back-to-back series of lower treasury yields with the 10-year benchmark dripping lower on Thursday to its lowest reading since December as it hit 3.04%. Global bonds are a little weaker as fears over the sovereign debt crisis eternally bubbling across the Atlantic lose some vigor.

Eurodollar futures – April personal income and spending data provided few market surprises earlier on Friday coming out in-line with forecast. Spending slowed for a third-straight month confirming that rising food and gasoline costs have dulled consumers’ power. The latest University of Michigan confidence reading is due to remain unchanged when it is released later on Friday morning. Eurodollar futures trading is slow into the weekend with many dealers cutting the work day short. Deferred contracts are weaker by a couple of basis points while the yield at the 10-year contract rose to 3.07% after the June treasury future fell to 123-22. Ahead of the release of data the contract failed to breach 124-00 stopping short at a fresh contract high at 123-28.

European bond markets – Former Bundesbank Chief Economist Otmar Issing told an audience that Greece had lied in order to get into the single euro currency. “It’s difficult to know how we should deal with cheaters,” he said. Herr Issing said that Greece was unlikely to honor its debt despite promising to accelerate sales of state-owned assets and reduce spending. German state inflation data provided a positive surprise to end the week as each of the five turned in monthly inflation declines that could help push the composite nationwide rate back to 2% when data is finalized. German bunds responded by rising to 125.77 pushing the yield beneath 3% before profit-taking set in. Euribor contracts were in mildly positive territory.

Canadian bills – The fiscal strength of Canada continues to provide a comfortable backdrop to fixed income trading and as dealers warm to the notion that the Bank of Canada is increasingly imprisoned by the path of the U.S. economy, yield spreads have further compressed. March bill futures leapt on Thursday challenging the highest price since November. The cooler economic reports coming from Canada’s main customer have in one sense made it more difficult for the Bank of Canada to impose further monetary restrictions on businesses and consumers at a time when consumption is softening domestically. Investors are locking into higher yields, buying bill futures and extending assets along the yield curve, pushing it ever closer to that of the U.S. The narrowing continued into the long weekend with BA futures grinding one pip ahead as Eurodollar futures eased by the same amount. The march contract trading at 98.31 implies that three-month cash will be at 1.69% in 10-months’ time compared to a current official short-rate of 1%.

British gilts – Short sterling futures eased following a surge in consumer confidence according to a May GfK reading. Its measure of confidence rose from -31 to -21 for the biggest upswing since 1993, although the feel-good factor is most likely accounted for by the marriage of Prince William and Kate Middleton surrounded by more vacation days than a barrel of monkeys would know what to do with. As the impact of the report wore off, sterling futures found a footing and look set to close with a minimal loss of one basis point. Looks like dealers are moving to the September gilt contract with volume ahead of the June future. The new contract today reached 120.13 shaving its yield by one pip to 3.29%.

Australian bills – Investors reduced expectations surrounding higher interest rates at the end of the week. The Aussie dollar firmed and commodity prices rose. Bill futures added three or four basis points as dealers banked on weaker U.S. data as rationale for expecting lesser likelihood that the Reserve Bank will further tighten policy. Benchmark government bond yields took a three-pip step lower falling to 5.22%.

Japanese bonds – Fortunately for Japan, its government debt is mainly held by domestic investors. That’s why when risk aversion strikes, investors scurry for the yen due its lack of vulnerability to overseas investors punishing it. Today’s Fitch ratings warning that the credit outlook is now set to negative first of all came too late for JGB trading, but also is unlikely to alter investors’ attitude to holding domestic paper.

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.

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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