A healthy bond market rebound gathered pace on Thursday after four days of selling. The demand for the safety of government paper fell by the wayside somewhere outside of Athens after yesterday’s successful parliamentary vote. Dealers attempted to drive yields lower following further dull news from the labor market in the world’s largest economy before a surprise jump in a Chicago-area manufacturing index sent yields into reverse gear and to the highest in a month.
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Eurodollar futures – A standstill for initial claims through last weekend was accompanied by a weaker trend for continuing claims. The numb data was enough to allow investors to refocus their attention to the perennial bugbear of officials at the Federal Reserve after the escalation of the Greek sovereign debt crisis. A struggling labor market provides investors to hold paper on the view that the Fed will continue to provide ample liquidity and maintain ultra-low policy for an extended (and indefinite) period of time. However, proving what a wonderful town Chicago really is, a purchasing managers’ survey jumped to 61.1 from 56.6 defying expectations of a decline. Bond traders trashed the yield curve in response to the exuberant reading of health for the region. The September treasury future sank from a session high at 123-02 to as low as 121-28, which piled a further seven basis points on the 10-year yield leaving rates at 3.18%. Just one week ago fears for the health of the economy along with worries over Europe drove yields to the lowest in seven months at 2.84%. Nevertheless front month Eurodollar contracts continued to rebound, while losses were felt at the back-end. I noted a similar movement in yesterday’s commentary and to maintain that theme calendar spreads widened further on Thursday’s curve steepening. The March 2012/March 2013 spread widened by eight basis points on today’s rethink, while the March 2012/March 2014 widened 16 basis points as the green strip cascaded lower like a waterfall.
European bond markets –Hopes for inspiration at a Berlin convention of financiers and the German ministry is running high. Some insiders are predicting an imminent statement outlining a formula that would see bankers and insurers holding Greek government debt roll maturities and prevent a default. The rumors sparked gains for other peripheral government paper where sharp falls in yields have been sustained. However, a rally for the September bund quickly ran out of steam dragged down by the Chicago numbers. The contract reversed from its session high by 82 ticks before stabilizing at 125.42 to yield 3.03% for a session gain of five basis points. Euribor contracts remain four basis points lower on the day as investors remain nervous over a guaranteed interest rate increase at the July session at the ECB next Thursday.
Australian bills – Bears sold bill futures with fury for a fourth session as the clouds quickly left the horizon after a positive outcome from Athens on Wednesday. The shift in the structure of the yield curve has been remarkable during the last month as sentiment swung from a cast-iron certainty that the Reserve Bank would tighten rates to predictions on Monday that the central bank would soon slash its policy setting. The implied yield on the year-end December contract slumped to 4.70% this week before dealers locked in to low borrowing costs. The rise of a further seven basis points in today’s session saw the implied yield shift higher to 4.92% as investors priced out an easing in policy. A report showing an expansion of credit during May to private sector borrowers also fixed investors’ eye back to domestic events and away from crisis abroad.
Canadian bills – Bill prices slumped, building on midweek blues brought on by a strong inflation report. A government report on Thursday showed a resilient Canadian economy that refused to buckle despite supply-chain reaction to the events inspired during March in Japan. GDP during April had been expected to contract, but in the event stood still with mining and trade floating the boat. Implied yields rose by a further three basis points at the short-end, while government bonds were hardly immune from vicious selling in-line with the trashing served up for treasuries. The September Canadian bond future slid by 36 pips to 123.84 to yield 3.12%, four basis points higher on the day.
British gilts –The sterling curve was marginally insulated from a shellacking on Thursday by a slide in consumer confidence according to a GfK poll. Front-month short sterling futures continued to reflect little change in monetary policy at the bank of England, while deferred contracts fell prey to global curve steepening. Deferred maturities expiring in 2013 declined by up to six basis points. The gilt market is off by almost a full point from its session high as selling starting in the U.S. treasury market inflicts damage in European markets. The September future is lower by 56 ticks at 120.14 as sellers drove the yield dour basis points higher to 3.36%.
Japanese bonds –Yields rose by two pips on 10-year Japanese debt as investors found a greater appeal in rebounding equities around the region, while some positive construction data also dulled appetite for the safety of fixed income. The JGB future expiring in September lost a further 20 ticks overnight to 141.14.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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