A sizzling equity market rally took most of the shine away from government bond prices on Tuesday as investors tossed core European bonds down the safety chute. Yields rose sharply after EU officials ruled out a “total restructuring” of Greek debt and announced that they were engineering a new package likely to be unveiled towards the end of June.
European bond markets – Leaders from the so-called troika are putting the final touches to progress reports to establish just how much progress, or otherwise, Athens is making after phase one of its €110 billion aid package. Fears over a Greek government default receded after EU officials said they may be able to launch a lasting solution to the crisis at the end of next month. Demand for Greek bonds rose after 10-year yields breached 2010 crisis levels of 17% on news of a possible breakthrough in discussions. In order to qualify for a second phase of financial aid, Greece must demonstrate it is sticking to the conditional guidelines. German bund prices declined lifting the benchmark 10-year yield higher by six basis points to 3.03%. Investors were non-plussed over a dip in the CPI inflation gauge, which eased to 2.7% during May according to government data. June expiration bund futures shed 55 ticks to 125.14 while short-end euribor contracts slipped by five basis points along the yield curve as tensions eased across the Eurozone.
Eurodollar futures – The bump at the bottom of the safety chute was less pronounced in the treasury market on Tuesday with a rise in yields tempered by continually strong demand for government bonds even in light of a strong rally for equity prices. September note futures slipped to 122-07 at the lowest point of early morning trading, while Eurodollar futures eased by three basis points from March 2013 expirations outwards.
Canadian bills – The Bank of Canada maintained a 1% short term rate of interest but in its accompanying statement reiterated that at some point prevailing stimulus would have to be withdrawn. But it also warned that the process was likely to be tempered by a muted U.S. economic recovery where strains on household balance sheets would restrain spending. It made no changes to its inflation expectations with data likely to remain at or above 3% in the near-term before falling back beneath it in the medium-term. Meanwhile the Bank reiterated the challenge it faces in setting monetary policy when constrained by a lofty local dollar, which adds to downside pressure on inflation if maintained. Investors determined that the statement was a little more hawkish in its tone and sold bill futures, lifting implied yields by up to eight basis points in light of a strong rally in the contracts last week. The 10-year government bond future expiring in September shed 20 ticks to 124.04 lifting the yield by a basis point to 3.07%.
British gilts – British interest rate expectations firmed with investors taking their tone from a firmer tone across Europe. Hopes that the Eurozone’s peripheral crisis may be entering a final phase dulled interest rate expectations sending implied yields higher by a couple of basis points. The September gilt futures contract eased by 15 ticks to 119.99 sending the yield higher by four basis points to 3.30%. Government data showed an April rise in home prices of 0.8% leaving them lower by 1.3% from a year earlier, further weighing on interest rate expectations.
Australian bills – A strong risk-on rally that rebooted the equity markets across the region failed to shift interest rate expectations in the Australian market. Implied yields rose by a single basis point although government bond yields responded with a five basis point increase to 5.23%. Home prices fell by 0.3% during April while softer building approvals data also kept a realistic handle on monetary policy expectations. Approvals dipped by 1.3% leaving year-on-year data pointing to an 11.5% loss. Private sector credit remained flat during the same month.
Japanese bonds – Government bond yields rose by the most in eight weeks as JGB futures slid by 30 ticks to close at 140.61. Construction orders rose by 31% compared to a year ago, while data showed housing starts rose by 0.3% during April. Intentions across manufacturers show an 8% increase this month followed by a 7.7% increase for June, with some analysts pointing to the fact that if expectations are met, it won’t be long before manufacturing is running at pre-earthquake levels. The 10-year government bond yield rose to 1.15%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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.