Yields struggle to advance as equities soften

Treasuries are looking tired after targeting fresh lows repeatedly for the year, while European debt markets appear to be also limping towards the finish line. Weakness in equity markets has so far failed to inspire bond traders at the start of a rather quiet week.

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Eurodollar futures – The Eurodollar yield curve steepened a little after shorter-dated implied yields softened while back-end futures rose. September note futures were higher earlier as pre-market stocks suffered ahead of a rebound that saw a brief revival in the appeal of equities. However, one-hour into the trading session and equity prices are nursing an ugly loss, deeper than indicated ahead of the opening, while Treasury traders don’t feel compelled to come rushing in. Yields at the 10-year rose back above 3% having traded at 2.94% after Friday’s disappointing employment data spurred demand for safer assets in light of a slowdown in growth prospects.

European bond markets –German bunds rose following the first dip in eight months for the producer price index during April. In March the PPI had risen by 6.8% reaching the fastest pace since September 2008. The slowdown will hopefully continue in light of further commodity price weakness during the last two months. German debt also accelerated in price to reach a session high for the September contract at 125.07 following further slippage in continental equity bourses. The yield dipped by one basis point to 3.03%.

British gilts – Short sterling futures continued to rise pushing implied yields lower following an IMF report that said Chancellor George Osbourne should see through stringent budget spending cuts in order to reduce the deficit regardless of the impact on growth. The IMF assessment said that inflation would return to target in due course. Earlier the Chancellor defended his post after a letter was sent to the Observer newspaper signed by a group of 52 economists calling for a reduction in the severity of the deficit-reduction package as growth bears the strain. The letter said that cuts to spending are impacting growth and would increase the deficit by reducing taxable income and increasing welfare costs. Gilt futures rose pushing the 10-year yield lower to 3.27%.

Canadian bills – U.S. yields crossed back above Canadian government yields following a 21% drop in April building permits. During March the reading rose by 16.8%. The Bank of Canada remains largely slave to the progress of the U.S. economy with little chance of an independent move to tighten the monetary reins at this stage of the game. Bill prices have come off highs achieved earlier in the session with the strip currently reflecting unchanged prices on the day.

Australian bills – Bill prices softened by two basis points as the credit market braces for Tuesday’s RBA meeting although few are calling for a rate rise out of the Reserve Bank. The implied yield on the September contract rose to 5.10% while the yield on the government 10-year contract added the same amount rising to 5.25%. An ANZ monthly reading of jobs advertised reported a drop of 6.5% during May, possibly indicating a slowdown in the labor market.

Japanese bonds – With an increasingly gridlocked political situation in Japan, investors are growing less optimistic that Prime Minister Kan will be able to carry off the necessary fiscal measures necessary to dampen the deficit. Yields added two basis points as investors also struggle to understand the value in an era of sub-1.20% yields. The June futures contract slipped nine pips to 140.96 while cash 10-year bond prices fell adding two pips to the yield to 1.13%.

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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