Bond spreads blow-out as focus turns from Athens

Japanese bonds –JGBs were barely changed on Wednesday ahead of a reading on Thursday of machinery orders. Prime Minister Kan warned over the likely flood of bonds needed to finance rebuilding efforts following Japan’s earthquake. The September JGB future dipped by five pips to 140.73 to yield 1.17%. Data used to compile coincident and leading indices from May both proved that economic conditions improved at the time.

Australian bills – Bill prices advanced on the Sydney Futures Exchange a day ahead of a key employment report that will provide the latest reading of the health of the Australian economy. Economists are expecting a net change of 15,000 new positions for June. The escalating European crisis, however, grabbed more attention ahead of the report and helped allay fears that the RBA was even close to a further monetary tightening. Dealers second-guessing the report figure that even if employers added to job openings last month, the lack of light at the end of the debt tunnel in Europe is likely to exert stronger pressure on the central bank to stay “prudent” and keep rates stable.

Canadian bills – The Canadian curve continued its attempt to flatten as concerns over the ailing sovereign health of Europe’s periphery grew. The softer tone to yields driven by the debt crisis was reinforced by weakness in the U.S. ISM non-manufacturing survey where the headline reading of 53.3 was marginally lower than expectations and marked a dip from 54.6 in May. The slowing U.S. economy, albeit possibly in passing response to a slump in Japanese output following the earthquake, still plays out as a negative for the health of the Canadian economy. Bill prices advanced by six basis points with the September 2011/September 2012 calendar spread narrowing by as much in the session as rate expectations continue to edge lower.

British gilts –Gilt futures added almost one full point on Wednesday shaving seven basis points off the benchmark 10-year yield as European woes mounted. An earlier report from the BRC depicting the fastest pace of rising retail costs had zero impact on monetary policy expectations in the face of growing concerns over a possible sovereign default was closer than feared on the horizon. Short sterling futures rose by up to double-digits at deferred expirations while, as with Eurodollars, prices underperformed at nearby maturities on liquidity fears. The September gilt future recently traded at 121.45.

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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