The worst fears investors may have harbored ahead of the weekend failed to materialize on Monday although there remains a bid to bonds keeping yields low. There is a sense among investors that even if the Greek Parliament manages to pass the €78 billion fiscal austerity package midweek, European leaders will be powerless to prevent the crisis from spreading. And while bond prices have retreated from gains made in to the weekend, the noteworthy action is across several short-ends where investors have started to price in either an end to central bank tightening or the start of a new wave of easing.
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European bond markets –September bund futures were higher at the start of trading, only to fall in to the red by mid-morning as the euro pulled itself off its lows. Hopes that Mr. Papandreou will pull off the passage of the bill remain intact despite occasional news of defections among his own party. But the market senses that politicians don’t want to confront what might be on the other side of the curtain and that they will ultimately rally around the bill. There is also some enthusiasm that agreement will be reached with private investors that would stave off a default. French officials have been negotiating with creditors and hopes are high that 70% of bonds can be rolled without coercion to extend maturing bonds to longer-term maturities. German banks remain at loggerheads with the government holding out for further concessions before they will agree. Euribor futures are a shade lower although the implied year-end three-month cash rate remains close to its lowest in almost six months as investors conclude that even if the ECB tightens at its July meeting, it won’t be in a hurry to push harder given the knock to consumer and business confidence especially as commodity prices helped unwind inflation fears.
Australian bills – Money market traders further boosted bets that the Reserve Bank will soon reverse its recent efforts to damp growth and contain inflation through monetary tightening. Implied yields on bill futures slumped by a further 13 basis points on Monday as investors maintained a keen eye on the European debt crisis. While implied yields fell to the 4.75% benchmark rate set by the central bank, cash typically trades at an 18 basis point premium. Dealers are fearful that the Australian monetary authorities are more likely to be challenged by a global activity downturn as opposed to rising inflationary pressures. On Monday both crude oil and gold prices spearheaded a further dive for commodity prices. The government 10-year bond yield also edged within one basis point of 5%.
Eurodollar futures – Bond prices are choppy with the10-year future oscillating between gains and losses. A rally for stocks is underpinning risk appetite while leaning on government bond prices. An earlier government report showed that domestically, consumers failed to maintain an increase in spending. The personal spending data for May was flat while a gain for April was revised down. Retailers have noted that the high price of gasoline and increases in food bills has kept spending in check. Eurodollar futures are looking a little heavy with contracts at the belly of the curve falling by four pips. The yield on the benchmark Treasury note remains unchanged at 2.86%.
Canadian bills – Money market participants continue to push back the likelihood of further changes in the activities at the Bank of Canada. Bill futures rose again shaving a further four basis points off implied yields at the session’s most bullish point. While there is admittedly limited room for the Fed to maneuver its monetary policy, the Bank of Canada had been raising monetary policy and the legacy of expected tightening is now being unwound at a ferocious pace. Expectations of where comparative year-end cash prices entered a new phase last week when liquidity pressures among European banks caused upwards pressure on short-dated U.S. yields. At the same time Canadian yield expectations were smashed forcing the two curves to converge. The December spread has narrowed by 30 basis points in the last two weeks and by 53 basis points since the start of May.
British gilts –Short sterling futures fell a little in sympathy with euribor futures again after a decent fear-fuelled rally last week. The sterling strip is lower by a tick-or-two while the yield on the September gilt future added two basis points to 3.14%.
Japanese bonds – Investors continued to seek solace in the safety of Japanese government bonds driving yields at both five-and 10-years to the lowest since November. Both the MSCI Asia Pacific index and the Nikkei fell heavily to start the week as concerns remained elevated ahead of this week’s Greek vote on austerity measures. The 10-year government bond yield slipped to 1.085%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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