U.S. 10-year tests 3% yield as job clouds gather

Canadian bills – Bill prices are tussling with the dilemma of whether or not to follow the statement issued by the Bank of Canada as it maintained its short term rate of interest earlier in the week. Implied yields jumped sharply Tuesday when the Bank warned that at some unspecified point it would take back monetary stimulus. There were, however, two caveats. The exchange rate continued to bear down on inflation while the Bank also warned that weakness in the balance sheets of U.S. households and corporations would likely mean that the recovery would proceed at the pace of a snail. More anemic U.S. data lifted the spirit within the Canadian interest rate market as dealers suspected that the central bank’s desire to tighten would only be hampered by the pace of the recovery. U.S. 10-year yields fell at twice the pace of the decline in Canada’s equivalent yields Wednesday forcing the premium to shift back to Canada.

British gilts – Yields in the U.K. were already on the decline before the fresh push inspired by weaker U.S. data. A sharper than forecast slippage in the pace of expansion in the manufacturing sector was enough to prompt gilt buyers to force the benchmark yield down by two pips to 3.27%. Short sterling contracts at more distant maturities shed up to five basis points in yield as rate expectations softened in response to weak consumer credit and mortgage approvals data from the central bank.

Australian bills – Aussie credit markets responded to a well-flagged contraction in first-quarter growth by selling off sharply. The domestic currency surged on relief that the GDP contraction of 1.2% wasn’t any worse while implied yields rose by seven basis points as though the report was the harbinger of further rate increases from the Reserve Bank. In reality the market is expecting just one more interest rate increase over the course of the coming year. Benchmark bond yields rose by three basis points to 5.23%.

Japanese bonds – Rising political drama failed to shift government bond yields midweek even as Prime Minister Naoto Kan faces a possible vote of no-confidence for his handling of the March earthquake and nuclear crisis. JGB futures slipped by one tick closing at 140.61 to yield 1.145% while onlookers grow concerned that the political backdrop is insufficiently strong to enable delivery of tough enough measures to help ease the nation’s gigantic debt burden.

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.

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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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