Bonds routed after Chicago data released

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.

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