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.
Canadian bills – On a data free day the Canadian yield curve simply followed losses apparent across the American curve with implied yields on bill prices gaining a couple of ticks before recovering. The September government bond future fell to its weakest in four days as U.S. treasuries traded softer with the contract slipping to 124.47 by mid-morning in New York to yield 3.05%.
Australian bills – The Reserve Bank sounded awfully dovish in its policy statement announcing a stable short rate of 4.75% at its June meeting. The Bank said that with current rates it expects inflation to return to the 2-3% target band within 12 months and dashed hopes for further interest rate increases. The odds of a rate rise in August now stand at 28% compared to 60% ahead of the decision. The lower likelihood of monetary tightening was reflected in a six basis point increase in bill prices. Yields on shorter-dated government bonds eased in line with that on the two-year falling to 4.82% while 10-year paper declined to 5.23%. The RBA noted that investment intentions by corporations outside of the energy and mining sector were far less optimistic than those within the sector and as such raised risks for the economy.
Japanese bonds – Moody’s Investors Services again warned that the tenuous political climate in the Asian nation was threatening to stall the government’s efforts to prevent an increase in the debt burden. A marginal decline in the participation rate at a 30-year government debt auction unnerved investors sending its yield up by two basis points, although a reversal in the fortunes of the Nikkei 225 index also took the shine off bonds. The 10-year government bond future expiring this month shed 21 pips to 140.72 lifting its yield to 1.16%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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