Bonds lifted on residual Eurozone fears

After a sour-end to last week, government securities have come in firmer after a vacation-extended long weekend. Equity indices are failing to build on a strong rally last week, which was based on relief over a Greek vote to implement deep austerity measures. Fixed income is higher on Tuesday as yields pull back from a sharp rise.

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European bond markets – Lingering fears remain among investors with few able to put their fingers on quite what the post-Greek vote problem is. Italian and Spanish government debt prices fell on Tuesday forcing a mild widening of spreads against core German government bunds. There remains a sense of unfinished business as European officials look to the ratings agencies to find out whether any plans in the making involving soon-to-mature-Greek bonds will find a seal of approval that would view selective default as merely temporary and insufficient to term as out-and-out default. But a slowing regional economy is also throwing up new challenges. May retail sales across the zone slid by the most in over one year, while a slowing services sector was evidenced by PMI data. Yet on Thursday the ECB has all but promised to counter inflation with its second monetary tightening. September bund futures are mildly higher but off a post-data peak. The 10-year bund yields an unchanged 3.01%.

Eurodollar futures – Three-month contracts were already on the rebound ahead of a report that showed factory orders failed to rebound during May as much as was predicted. The report showed a gain of 0.8% in orders on the prior month falling short of an anticipated 1% gain. The September Treasury note future was also already ahead on the session as investors reflected on a five-day slide that lifted yields by more than 30 basis points. Yields at the 10-year maturity eased by five basis points to 3.13% on Tuesday as investors look ahead to Friday’s employment report that when all said and done is likely to leave the rate of unemployment at a heady 9.1%.

Japanese bonds –An improving domestic economy and a report showing a healthy jump in wage growth last month left investors wondering how the government might successfully auction fresh bonds in such an environment. With a large looming 30-year auction this week investors tried to make room for new supply by selling longer-dated maturities causing a rise in the yield curve. The yield on 10-year paper also added one basis point as the September JGB futures contracts fell by 11 ticks to 140.80 carrying a yield of 1.16% and the highest in two-months.

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