Steady equities forces bond selling, yields rise

Government bond prices face a second lackluster day as equity traders mark prices higher and thoughts of challenges to economic growth take a back seat to hopes for a resolution to the European sovereign debt crisis. Yield curves remain relatively static with some light profit-taking providing the greatest impetus on an otherwise quiet day for trading.

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Eurodollar futures – With no domestic data to remind dealers that the economic outlook is slowing, bond prices are failing to push any higher for as long as equity prices remain buoyant. While 10-year yields closed Monday beneath 3% once more dealers couldn’t sustain the rally and some light profit-taking has sent the borrowing cost at the 10-year benchmark back to 3.03%. The Eurodollar curve steepened by just one basis point from June 2011 through December 2013.

European bond markets – German bunds dipped during late afternoon trading to a session low of 124.67 (September contract) after a strengthening in German factory orders during April prompted investors to prepare for a possible warning on Thursday from the ECB that policy is still in tightening mode. The benchmark 10-year yield rose by four pips to 3.06% while implied yields on short-dated euribor contracts added two basis points. Desire for the safety of core European bonds was lower following ECB President Trichet’s signal that the central bank won’t object to a rollover plan for maturing Greek debt. He would object to default, but should private investors voluntarily agree to renew debt the central bank would not object. Still, some tensions remained intact Tuesday with Irish and Portuguese government bonds continuing to suffer with only some of the uncertainty diffused.

British gilts – Gilt futures are sitting on session lows marking the lowest price in five days as investors mull the positives surrounding what the ECB has to say over a proposed solution to the challenge facing Greek bondholders. Short sterling futures were higher for most of the session although late in the afternoon losses for euribor contracts helped push implied yields back to unchanged. Interest rate markets reflect little if any prospects of a tightening in monetary policy from the Bank of England through year-end with the implied yield on the December contract standing at 1%. By way of comparison three-month Libor runs at around 0.83%. The March contract on Tuesday reached its lowest implied yield in eight months before retreating to unchanged. At its most bearish the contract implied a three-month cash rate of 2.13% by next spring as inflation got out of hand.

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