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.
British gilts – Short sterling futures also rose as investors were quick to unwind losses resulting from Tuesday’s risk-on session. Yields slid by four basis points despite the biggest jump in consumer confidence in five years according to a Nationwide report, although the mortgage-lender confessed that the rise was likely related to the royal wedding. September gilt futures erased an earlier loss and recently traded with a gain of 37 ticks at 120.98 sending the benchmark 10-year yield down to 3.26%. The British economy shed more jobs than expected over two months ending May according to a 19,600 rise in jobless claims according to a report released by the government on Wednesday. Although the claimant count remained at 4.6% the rising toll of public worker cuts is clearly starting to filter through.
Canadian bills – Canadian bill prices advanced across the curve with the exception of the September contract where the implied yield stood still. An earlier report showed a drop off in manufacturing sales during April as the global economy began to cool. Manufacturing sales slipped by 1.3% and fairly much in-line with forecast. Implied bill yields dipped by two basis points while a 30-tick advance in the September government bond future to 124.71 sent the 10-year yield lower by three basis points to stand at 3.04%.
Australian bills – Aussie bill prices were rocked by a resumption of a more hawkish tone from central bank Governor Stevens when he predicted that inflation was “more likely to rise” over the next few years. Only last week the central bank offered the money market a sense that policy was on hold and maintained an unchanged stance also predicting that inflation was likely to remain on target over the forthcoming year. Bill futures fell by four basis points although the market seems unsure on how far to react to the threat of a new rate rise. It seems that if a further tightening comes it won’t be until August at the earliest and investors appear to believe that there would be no further need to act. Benchmark government bond yields fell by two basis points to 5.19%.
Japanese bonds – Asian stock markets failed to carry over the surging tide of optimism that flowed over from American markets overnight. However, government benchmark yields added one basis point to close at 1.15% as investors continue to grow wary over the prospect for fiscal reform.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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