U.S. yields pushing 2011 lows on labor market fears

European bond markets – An earlier slide in German bunds was fast-reversed in light of the latest jobs report in the United States. Dealers had earlier sold bunds on growing hopes that the Greek default issue might be successfully put to bed before the end of June. A gauge of service sector activity across the Eurozone surprised to the upside as activity strengthened during May leading to a rise in yields during the European morning. However, news that growth in the labor market was hitting the skids caused a flurry of fresh buying on implications for global growth. The June bund future rose from its session low of 125.34 to reach 126.04 sending the 10-year yield lower to 2.96%. Euribor traders also carved out a healthy range of six basis points across most contract months with implied yields currently softer by a basis point in late afternoon trading.

British gilts – Gilt futures also wiped out earlier losses of around 25 basis points for the September contract as news of a weakening labor market depressed yields lifting the contract by the same amount. The benchmark government yield slipped by two basis points in to the weekend at 3.22%. Early morning weakness in short sterling futures prices was reversed following the release of a softer-than-expected PMI gauge of service sector activity. Unlike on mainland Europe, service sector activity was curbed in Britain with the reading slipping to 53.8 from an April number of 54.8 as government spending cuts and tax hikes bite into inflation-weakened disposable income.

Australian bills – The perceived likelihood of further monetary tightening softened marginally at the end of a tough week for equity markets, falling in response to softening growth prospects. Although bond prices in Australia remained unchanged, with the 10-year yield static at 5.20%, bill prices at the short-end advanced by a pip or two following the revelation that service sector activity returned to contraction territory during May. Arguably this is a less important sector than the key export-sensitive and investment-driven mining sector, unless of course you are reliant on the services sector, which many Australians are. Activity within China’s service sector softened last month albeit from an already high reading of 62.5 to 61.9.

Japanese bonds – Bond yields remain static in Tokyo with onlookers concerned that 10-year yields below 1.2% are too low to encourage fresh buying in coming weeks especially in light of escalating political turmoil now that Prime Minister Kan said he’ll stand down. The timeline for his departure remains uncertain with some party members saying that post-earthquake order will not be restored until early 2012. Meanwhile yields rose by 1.5 basis points on the week to close at 1.13% with the June JGB future attracting a flurry of buyers towards the close to end the session eight pips better at 141.13.

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.

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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