German bunds bubble as European stresses mount

British gilts –With little fresh impetus for investors to price out any change to policy settings, short sterling futures are unchanged heading into the weekend. The June 2012 expiration advanced during the week shaving five basis points off the implied yield one-year forward. Rate expectations were further desensitized following the release of minutes that revealed the Bank of England was considering additional bond purchases in light of an unexpected downturn in domestic demand. The September gilt future is marginally higher at 122.38 today having rebounded from significant weakness earlier in the day to a session low at 121.89. The yield on the benchmark 10-year gilt is unchanged at 3.15%.

Canadian bills – Bill futures are once again back within an ace of last week’s highs regardless of the firmer U.S. durable goods orders. Dealers have been dismissive of the likelihood of further bank of Canada monetary tightening and gradually lending into the yield curve pushing implied yields lower as the price of bills of acceptance (BAX) futures contracts rises. And as liquidity issues are weighing on front-month Eurodollars contracts, the spread between the two curves closing faster than expected. During the last week December Eurodollar futures have shed 10 basis points as European investors bid up dollar borrowing costs in order to swap the proceeds into euro deposits. At the same time dealers recognizing the slimmer chance of a policy change from the Bank of Canada have driven the price of the December bill higher by 15 basis points. The spread between the two has narrowed ridiculously to 90 basis points as a result while the current three-month cash differential stands at 93 pips.

Australian bills – Futures traders now predict that the Reserve Bank will be inactive through the end of 2012 according to implied yields on bill futures. The December 2012 contract closed the week at 95.00 and just 25 basis points above the current short-term cash rate of 4.75%. The market currently feels that the central bank has abandoned its policy weapons in an attempt to fight inflation that stems purely from the biggest investment in the mining sector in a century. The Bank’s recent minutes also hinted that policy prudence was likely required in consideration of the mounting European debt crisis. Government bond yields rose by three basis points to 5.07% at the weekend.

Japanese bonds – The Japanese yield curve eased again sending cash yields at the two-and-10-year maturities to the lowest since November. There was no economic data for investors to trade off into the weekend but the relative safety of fixed income remained a key theme ahead of next week’s vote in Athens.

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.

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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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