Bonds soften before Greek lawmakers assess PM

Yield movement is thin and far between on Tuesday and ahead of a crucial vote in Athens that may determine whether Greece becomes the first euro-area nation to default on its debt. Even though the stakes remain high global markets have been soothed by comments from euro-area chief Juncker who says that by hook or by crook, Europe’s debt crisis will be resolved.

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European bond markets – A dip to the weakest reading in more than two years for confidence among German investors was not quite what was needed as the accelerating debt crisis kept investors on their toes. A downturn in Europe’s biggest nation at a time when fiscal challenges have come to a critical juncture reminds investors that signs of a global economic downturn pose an additional threat. German two-year paper advanced earlier in the session with yields out as far as 10-years remaining bid by investors concerned that Greek Prime Minister George Papandreou might struggle to win a confidence vote in the national Parliament. Without the passage of €78 billion in further austerity measures Greece won’t be provided with the next phase of loans agree to by its partners one year ago.

Eurodollar futures – The May existing home sales data was made less ugly by a back revision that prevented a 3.8% decline from playing out in to an expected 5% slide. Sales of previously-owned homes running at an annualized pace of 4.81 million units fell from a downwardly revised 5 million home sales during April. September note futures had little reason to remain bid not so much on account of the data, but because investors sank their teeth into the equity market on belief that there were bargains to be had. Note futures eased by six ticks to 123-20 as the yield edged back towards 3%. Eurodollar futures edged lower.

British gilts –Short sterling futures were dragged lower by the better tone to risk even following a speech by Bank of England Markets Director Paul Fisher who said that further quantitative easing was still a viable policy option. The British economy has visibly suffered recently in light of radical spending cuts at a time when threats to global economic growth have created additional domestic challenges. Implied yields added three basis points at further maturities while the September gilt future eased 13 ticks to 121.39 to yield 3.22%.

Canadian bills – A cooler than hoped for retail sales report for April in which six of 11 subsectors saw sales rise gave traders reason enough to sell Canadian bill futures by a couple of ticks on Tuesday. But the more optimistic tone to risk appetite was probably the larger catalyst. Canadian government bond prices slipped adding three basis points to the 10-year yield, which recently traded at 2.98%. The June 2012 BA contract fell adding three basis points to the implied yield at 1.75%.

Australian bills – The Reserve Bank’s meeting minutes from its June meeting helped bolster the cash market and cast further doubt on further interest rate increases. The central bank maintained its hawkish rhetoric by saying that policy would likely need to rise “at some point,” but felt that prudence played a more important role in the current environment of Europe’s debt crisis. Aussie bills advanced by two basis points. Futures contracts maturing out to September 2012 carry a sub-5% implied yield compared to the Bank’s 4.75% short-term policy rate. Aussie 10-year government bond yields rose by two basis points to 5.13%.

Japanese bonds – JGBs softened by nine ticks in the September contract to 141.13 in a benign environment for bonds. Domestic stocks rose weighing a little on bond market sentiment although a still-strong yen prevented yields from moving much. The 10-year cash bond closed unchanged at 1.11%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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