Some wing-clipping is taking place on Thursday as sellers drive government bond prices back down. Doves had flocked out of the cage midweek following a weak measure of the labor market dragging yields down by 12 basis points to cross the 3% threshold for only the first time since December 7. To put such a flight to quality in to perspective, the last such move followed the Japanese earthquake. Ahead of Friday’s government data some profit-taking has set in with investors concerned that sub-3% yields, already negative in inflation-adjusted terms, will stifle demand.
Eurodollar futures – September notes stretched to 123-17 toward Wednesday’s close spurred on by comments from Fed Vice Chairman Yellen who told a Tokyo audience that ultra-low monetary policy befitted an economy grappling with elevated unemployment. Market rumors of a central bank buyer have kept a lid on rising yields on Thursday and after initial claims slipped to a nevertheless disappointing 417,000 reading. In light of the weak ADP reading several economists have revised down their predictions ahead of Friday’s non-farm payroll reading and despite earlier selling notes are leaving behind the session low at 123-03. The yield on the benchmark note of 2.99% is five basis points higher than at Wednesday’s close. Eurodollar futures have traded in and out of the red so far and are inversely tracking the fortunes of the stock market, which is defying pre-market indications of a rebound from a midweek slide.
European bond markets – Mixed fortunes for Euroland bonds on Thursday. A Moody’s downgrade for Greece sent a shockwave across the region and drove yields on core paper lower at the outset of trading. The potential for a sovereign default now stands at 50% according to the agency. However, speeches by German Chancellor Merkel and ECB Chief Trichet appeared to rally the European community and provided a sense that leadership was preaching from the same gospel. An earlier rally in risk was prompted by the revival of fortunes for the euro, which traded at a three-week high and knocked some stuffing out of German bunds as investors felt less in need of safer assets. June bunds gave up on a session peak at 125.98 falling to a session low at 125.52 before steadying. Yields rose to match the 2.99% of U.S. treasuries. Short-end euribor futures are relatively unchanged.
Canadian bills – Shorter-dated bill prices staged a decent rally to 98.53 in the December contract in earlier morning trade but the rally fizzled and contracts are mainly down by a tick on the day. The decline in the implied yield curve means that the futures market have fully retraced the bearish response to the Bank of Canada’s recent statement on Tuesday that they’d be moving to further restrict policy at some unspecified point in the future. September government bond futures slipped by 19 ticks to 124.88 yielding 3%.
British gilts – Implied yields fell sharply after a Daily Mail interview with bank of England Markets Director Paul Fisher. He said that should the economy face a “sudden downturn” he’d consider voting in favor of advancing bond purchases. Mr. Fisher noted that the economic recovery was mired in a soft patch and his role was to ensure that the economy moved on to better footing where the inevitable task of reducing reliance on loose monetary policy could begin. The 2012 strip traded five basis points better as growth fears rose following his comments. Despite an unexpected increase in the PMI construction measure, gilt yields fell to 3.24% as the September contract advanced to a session peak at 120.87.
Australian bills – A stronger-than forecast jump in April retail sales was partially offset by a weaker-than hoped for trade surplus, which indicated possibly still sluggish demand for domestic exports. Money markets failed to respond to a 1.1% monthly gain in sales as shoppers spent more on clothing and footwear. The benchmark 10-year yield failed to respond to a stronger reading given the poor health of sliding stocks around the region and closed at an unchanged 5.21%.
Japanese bonds – Prime Minister Kan defused a plot to unseat his leadership ahead of a no-confidence vote by promising to resign as soon as the earthquake fallout is contained. Politicians voted 293-152 against the motion on Thursday. Regional stock prices plummeted following a heavy session on Wall Street with Tokyo losing 1.7%. Bond prices advanced as fears grew over the health of the global recovery sending the yield on the benchmark 10-year JGB lower by four basis points to 1.13%. June JGB futures advanced by 53 pips to close at 141.07.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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