Deal news sparked a Monday morning rebound for equities and stole the limelight from the recent surge in bond prices. Yields rose to start a week that delivers key inflation reports as well as a report showing how the consumer is faring in light of high energy and food costs. Meanwhile European tensions drove peripheral bond yields ever-higher ahead of a meeting between leaders with little sign of a stand down from neither German nor ECB officials over an approach to Greece.
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European bond markets –Luxembourg’s Prime Minister Jean-Claude Juncker is doing his best to heal the rift between ECB President Trichet and Germany’s Finance Minister Wolfgang Schaeuble. The position of the German government is that investors should be prepared to either take a loss on their holdings in Greek government bonds or at the very least should be prepared to roll over maturing debt for another seven years. But the ECB is a large holder of toxic Greek paper and has to stand prepared to buy more each time the market cracks its head open. In the eyes of the central bank, any meddling with maturity or anything less than the receipt of full-payment at maturity would potentially constitute a credit event putting the nation at default. In turn the ECB would have to close the gates to Greek financial institutions and would precipitate a further financial crisis. Bonds issued by Portugal fell sending yields to a record on Monday, while Greek and Irish paper was similarly trashed. September German bund contracts reached a record high at the outset of European trading before the focus shifted away from default and onto a rally for equities. Yields subsequently moved higher to 2.97% at the 10-year having earlier reached the lowest in five months, while the two-year yield at one point reached a three-month low.
Eurodollar futures – On an otherwise data-free day investors are warming to news of several weekend mergers that has cheered the equity market horizon and has caused a buoyant start to trading. The desire for the safety of government bonds is therefore a little softer with the September Treasury note future losing ground to 123-11 at its worst and lifting the yield back above 3%. Eurodollar futures shed upwards of three basis points as implied yields drifted higher.
British gilts – The September gilt future jumped to a record high early in the session as tensions built on the European authorities over Greece. Yields softened after the central bank referred to inflationary perceptions being “relatively well anchored” in its Quarterly Bulletin released today. The 10-year yield was later driven back as risk appetite deprived gilts of safe haven demand. Short sterling futures also eased by a couple of basis points as implied yields nudged higher by two basis points.
Canadian bills – Bill prices dipped lower but by less than Eurodollar futures. With a blank economic calendar for the day trading was light in morning trading. Government bond futures were ahead buy eight ticks although the yield on the cash 10-year bond added one basis point to 3.01% maintaining a minor premium over U.S. notes.
Australian bills – Both remaining three-month September and December bill futures now yield below 5% as investors remain doubtful over any further RBA action for the remainder of the year. The curve has now flattened substantially with the 10-year government bond today rebounding off its lowest yield point for this year adding two basis points to 5.18%.
Japanese bonds – Japanese yields nudged ahead by one basis point to 1.13% ahead of Tuesday’s Bank of Japan statement at the end of its two-day policy meeting. The Nikkei newspaper ran a story suggesting the Bank might initiate a new lending program to help companies who don’t have real estate to collateralize borrowings. The central bank has to consider whether to add fresh liquidity to the economy and received a prod in the back in the form of unexpected weakness in the April machinery orders report. Today data indicated that capital orders failed to rebound that month after the tsunami and earthquake during March. Orders are a good forward looking gauge of capital spending and a 3.3% monthly drop is not what the Bank will want to see.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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