Bunds rally as investors flee PIIGS' debt

IB Interest Rate Brief: Focus shifts to Athens

A Luxembourg meeting of European financial ministers concluded with the area-chief Jean-Claude Juncker telling reporters that his colleagues “forcefully remind the Greek government to fulfill its commitments.” Concerns grew over sovereign default as investors wondered just how willing the people of Athens might be in putting themselves through the further pain of austerity.

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European bond markets – After markets closed on Friday Moody’s warned that Italy was perhaps in-line for a downgrade on account of “long-term structural impediments to growth.” And of course the instability of the current financial market structure doesn’t help any at present. Investors headed to German bunds as stock prices slid and further sold bonds issued by so-called peripheral nations. Yield spreads widened out with investors demanding a further five basis point premium to hold Italian and Irish government debt. Premiums widened by seven basis points for Spanish bonds and 17 basis points for Portugal. As the New York morning wears on, however, the early advance in September bunds, which arose earlier to 126.59, is running out of steam. Yields earlier fell to within one basis point of the lowest since January trading at 2.90%. Euribor futures surrendered an earlier five basis point advance.

Eurodollar futures – September note futures have also recoiled from an earlier half-point gain with the contract currently slipping in to the red at 123-28 reversing an earlier dip in the benchmark 10-year yield challenging last week’s lowest yield of the year so far. As panic accelerated last Thursday the yield slipped to 2.88%. Eurodollar futures also pared earlier gins of a couple of basis points with deferred maturities currently lower on the session.

British gilts – September gilt futures slipped into the red having reversed earlier gains of as much as a half point for the 10-year contract. An earlier dip in the yield has become a rise of two basis points to 3.21%. Short sterling futures also surrendered a three basis point advance but the strip retains a positive tone on account of the threat of contagion from the possibility of a Greek sovereign debt default.

Canadian bills – Cooling optimism over the pace of global economic activity is evident within commodity prices on Monday. Further slippage in the price of crude oil reminds Canadian investors that earlier threat by the Bank of Canada to resume mild monetary tightening remains as far away as ever on account of mounting evidence that the global recovery remains muted at best. Bill prices advanced by three ticks at the outset of the panic-induced session although pared gains as worries appeared to fade as equity prices rebounded. Government bond futures also slipped back in to negative territory despite a catapult launch at the start of trading. The September contract reached 125.97 before sliding to 125.55 to yield 2.94%.

Australian bills – Aussie bills made a mild advance in light of slippage in regional stocks. Implied yields inched just one basis point lower while the 10-year yield on government bonds slumped by a further four basis points to 5.08%. The Reserve Bank tomorrow releases minutes from the early June policy meeting offering greater insight into its decision-making process.

Japanese bonds – Investors were disappointed by a bigger than suspected decline for exports during May. Acceleration of the economic recovery remains a challenge. Investors can’t decide whether a recent dip in Japanese yields has sufficiently discounted the knock-on effects of the March earthquake or whether a surge in second-half supply of recovery bonds will force investors to balk at the current era of low yields.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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