Bonds sell off after Athens says ‘yes’

Australian bills – The jury must now be out over whether the next move from the Reserve Bank is up or down for monetary policy. The flood of fear that washed up over markets during the last two weeks subsided over the last two sessions driving implied yields higher. The money market remains finely balanced with the recent bout of risk aversion forcing dealers to predict an imminent interest rate cut from the central bank. The hope for resolution towards the sovereign debt crisis starting with the success of Wednesday’s Athens vote has unwound such expectations for now. Bill yields jumped by 15 basis points Wednesday while government bond yields rose by 10 basis points to 5.21%.

Canadian bills – A dose of inflation hit Canada according to the May consumer prices report, which showed prices rose between months by 0.7% and more than twice the anticipated rate. Yield traders were already in cautious mood as the perceived need for the safety of bonds was already falling ahead of the Greek parliamentary vote. Implied yields rose as the report rocked money dealers who had assumed that the Bank of Canada was on indefinite hold in terms of its monetary policy after Governor Carney forewarned that a nearby inflation blip would return to target in a year’s time and almost by definition, would be non-threatening. A jump in energy and food costs has clearly given investors cause for concern with futures traders hedging their bets after a slide in short-dated yields. Bills of acceptance futures tumbled by eight basis points while the yield on the government bond jumped by seven as the spread between the U.S. and Canada widened by one basis point.

British gilts –Front-month short sterling futures rebounded after the Greek vote on an easing of liquidity concerns while far-dated futures were sold and fared double-digit losses beyond the 2012 strip. A dip in an index of services confirmed the dull economic outlook but the fixed income market followed the lead of other bond markets where easier rate expectations continue to be unwound. The yield on the 10-year government bond rose by six basis points beyond the Greek approval on Wednesday with the September gilt future falling by 71 ticks to 120.72 towards the close of electronic trading.

Japanese bonds –Japanese government debt fell following a report showing a rebound in output during May. Industrial production jumped by 5.7% between months. The approaching Greek vote had the same effect on investors’ appetite for Japanese debt as for other bonds. The dissipating safety allure forced some selling with futures expiring in September losing 25 ticks pushing the benchmark yield up to 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.

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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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