Yields slide as investors rethink rally

An anxious moment along the road to provide Greece with its next rescue payment and a higher than hoped for reading of U.S. inflation held back a rally for bonds. However, should risk aversion continue its rise before the weekend there seems little will stand in the path of a further swoon in yields to their lowest this year as evidence of a growth slowdown continues to show up.

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Eurodollar futures – September and December Eurodollar futures eased by a couple of basis points seemingly on nearby liquidity demand for cash. Elsewhere futures contracts advanced by the same amount thereby causing a not-insignificant curve flattening. Bond yields took back about half of the losses they fared Tuesday when an 11-basis point surge to 3.09% was the biggest move in five months. A slight increase in consumer price inflation on its own was not worrying and certainly insignificant in policy-setting terms, while the contraction in manufacturing in the tri-state region as depicted by the Empire state manufacturing index was worrying. Its return to negative territory was the first since November with the catalyst in June being supply shortages as a result of the Japanese earthquake in March. September treasury notes remain close to session highs of 123-01 as investors drive the benchmark k10-year yield back towards 3%. Cash bonds recently traded to yield 3.06%.

European bond markets – A Tuesday meeting of European officials failed to find common ground that would allow the IMF to deliver round two of financial assistance to Athens. The September bund future added 43 ticks sending the 10-year yield lower to 2.98%. German and French leaders will now meet in Berlin on Friday to try and resolve the problem. German politicians are demanding no less than an extension of maturities of seven years on Greek government bonds held by private investors. The French share the view of the region’s central bank admitting that to do so would probably trigger a default in the eyes of ratings agencies. An unexpected advance in Eurozone industrial production according to an April report failed to restrain a rally in short-dated euribor contracts whose prices advanced between four and eight basis points driving implied yields lower.

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