Bond rally loses steam, awaiting words from Bernanke

Government bonds remain higher although off earlier highs as fears remained elevated over Greek Prime Minister Papandreou’s ability to muscle through deep austerity measures. Late on Tuesday lawmakers gave the Prime Minister the vote of confidence he’d asked for but onlookers failed to find solace in the aftermath, recognizing instead that the more difficult task ahead will be convincing Parliament that €78 billion of spending cuts is in the interests of its nation.

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European bond markets – Without the safe passage of further spending cuts, loans agreed by the EU and IMF won’t arrive in July meaning that Greece would likely default. Peripheral government bond prices around the Eurozone fell in response to weaker market confidence midweek, while the price of core-German government debt rose sending yields lower. The September bund future advanced to a session high of 122.19 before U.S. equity futures turned from red to black. Nevertheless the contract remained in positive territory as the safety aspect of government debt remained intact. The 10-year yield eased by three pips to 2.95% while shorter-dated euribor futures illustrated growing stress adding up to five basis points.

Eurodollar futures – Treasuries remained yielding less than 3% for a sixth straight session ahead of an official FOMC decision over lunchtime. Later in the afternoon Bernanke grabs the microphone to deliver his policy assessment. September notes pared an opening bounce but remain 11 ticks higher at 124-00 yielding 2.96%. A report showed that April home prices unexpectedly rose by 0.8% during April, contrary to forecasts of yet another decline. Last week’s MBA mortgage application data showed both refinancing and purchase activity fell in the week through last weekend. Eurodollar futures advanced by five basis points as investors prepared to hear Bernanke reinforce an extended period for low interest rates.

British gilts –The end of the tenure of MPC member Andrew Sentance to the Bank’s vote-setting cabal resulted in one less vote for a an imminent rate increase. His replacement Ben Broadbent expressed an unchanged vote at his first meeting. However, Bank economist Spencer Dale maintained his vote to raise policy settings at the June meeting, although according to minutes released today, “data on the growth outlook during the month had been weak.” The main takeaway from the minutes is that the MPC appears increasingly concerned with risks to growth and inflation with Adam Posen calling for an immediate extension to bond purchases on the view that over the medium-term he believes that inflation will fall below target. Investors appear to be adapting to a weaker growth outlook set against the background of a tighter fiscal stance forcing analysts to push out further the time frame for monetary tightening at the Bank. Short sterling futures jumped by 10-basis points at deferred maturities with the 10-year gilt yield slipping by three pips to 3.18%.

Canadian bills – Implied short-dated bill yields remain close to the lowest in several months with bills of acceptance futures (BAX contracts) rallying by three basis points on Wednesday. Canada released no economic data midweek and cash yields remain slave to risk-on/risk-off events as reflected in Chicago Eurodollar futures.

Australian bills – Aussie bill futures were unchanged and implied marginally higher yields in some contracts. The weaker tone to risk appetite caused a softer domestic dollar although interest rate expectations are currently firmly in the camp of no-change to monetary policy for the foreseeable future. A leading index prepared by Westpac using latest available data from April revealed leading indicators rose by 0.2% for the month in comparison to a gain of 0.6% in March. The data incorporates money supply, building approvals and prices of manufacturing materials. Aussie government bond yields eased by two pips to 5.10%.

Japanese bonds – Japanese government bonds responded little to the recently announced plan of resignation by Prime Minister Kan who agreed to depart office in August. JGB futures rose by six ticks to 141.21 leaving the yield intact at 1.11%. PM Kan is facing hostile objections to a second reconstruction package totaling $25 billion although lawmakers extended parliament’s session in an effort to enable Mr. Kan to push measures through the lower house.

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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