Bond tumbled sharply following a better-than-forecast reading for retail sales. Earlier data from China also showed a still-bustling economy helping to undermine global slowdown theories. Yields on U.S. benchmarks responded by rising back above 3% as investors deployed cash into riskier asset classes.
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Eurodollar futures – Longer-dated futures contracts fell by as much as 10 basis points after dealers were pleasantly surprised by a smaller dip in retail sales activity during May. Investors had been braced for a sharper 0.5% slide while the report showed a modest 0.2% dip. Nearby futures prices fell by three basis points sending implied yields higher, while the September Treasury note future lost 21 ticks to yield 3.07% for an increase of nine basis points on the session. Investors also embraced stocks around the globe and sent the S&P 500 benchmark index by 1.3% on Tuesday. Dallas Fed Chief Richard Fisher also reiterated his stance that the Fed doesn’t need to stimulate the economy further and won’t be voting in favor of more easing.
European bond markets – In late afternoon trading in Frankfurt the September bund contract staggered to its session low sliding farther from Monday’s heights when yields were pressured lower on fears over gridlock on the Greek debt issue. The contract is lower by 50 ticks at 125.44 lifting the yield by seven basis points to 3.02%. There was no European data to report Tuesday although euribor contracts have been dragged lower by a stronger tone to risk appetite. Most contracts shed four basis points as equity prices rebounded.
British gilts – The decline in the September gilt futures contract was insulated following a reasonable showing for consumer prices during May. Although the report showed an annual pace stuck at a two-and-a-half-year high, the monthly pace of increase moderated sharply from 1% to 0.2% as surging commodity price gains continue to wear off. A DCLG house price survey helped maintain pessimism over consumption ahead with April home values slipping at an annual pace of 0.3%. Short sterling futures were lower as sellers drove implied yields higher by three pips although a sharper rise in yields was evident at deferred maturities. Yields on the 10-year government benchmark jumped by four basis points to stand at 3.29%. The premium over comparable U.S. treasuries narrowed to 22 basis points.
Canadian bills – Capacity utilization data for the first quarter was greater than expected at a reading of 79% compared to an expected 77.2. However, the world has subsequently slowed down with most investors moving to the camp that argues that the central bank will be in no rush to tighten monetary policy. Weakness in the Eurodollar futures strip prompted selling across the bill futures curve with the implied yield on the December contract adding four basis points to 1.53%. Government bond futures slid by 59 ticks in the September contract lifting the 10-year yield to 3.05%.
Australian bills – Strong industrial production and retail sales data on display in Beijing overnight reignited demand for riskier assets moving fixed income down a rung. The yield on government debt rose by four basis points to stand at 5.21% while bill futures fell by four basis points.
Japanese bonds – Japanese yields rose by one basis point at the 10-year to 1.13% after the Bank of Japan launched a two-year loan program offering up to ¥500 billion at a rate of 0.1%. The Bank of Japan sounded surprised at the disappointing rebound after March although says the economy may have positive surprises in the coming months.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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