The major catalyst in government bond markets has come not in response to the outcomes of various central bank meetings in Europe, but instead from the United States where a private report showed an unusually robust reading of jobs growth. Government bond yields marched higher but more notably so in the world’s largest economy with dealers now hopeful that the underlying anemic tone to the labor market will suddenly improve in an official government report on Friday.
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European bond markets – The European Central Bank lifted its benchmark rate to 1.5% as was widely expected on Thursday with all ears honed on the highly anticipated post meeting press conference. Euribor contracts are higher in price and lower in yield by a couple of basis points as investors anticipate that the prospect for further tightening has diminished in light of a global economic slowdown and a prediction that consumer price inflation will head back below the central bank’s target within a year. German bund prices dipped and felt the weight of a U.S. labor market indicator offering the prospect of an upswing in the recovery. The September contract fell to 126.18 for a loss in the session of 34 ticks sending the yield higher to 2.95%.
Eurodollar futures – The spread between U.S. and German 10-year government debt widened further to 20 basis points as Treasuries underperformed after a surge in payroll additions according to ADP. The payroll processor said payroll growth among private employers rose in June by 157,000 and more than twice a market forecast of 70,000 jobs. Concerns over the health of the American job market run deep as Fed officials constantly remind us and with the rate of unemployment stuck at 9.1% that’s unsurprising. Treasury prices slid in response to the strong reading Thursday and dealers now look set to remain cautious ahead of the release of the official report on Friday. Initial claims data, however, told another story. Although the weekly claims reading slipped to 418,000 to give a dip of 14,000 through the weekend, last week’s data was revised higher. Eurodollar futures took back recent gains as concerns over a double-dip recession receded. The implied yield on deferred contracts rose by 10 basis points.
Japanese bonds –A healthy 3% rebound in May factory orders failed to weigh on the September JGB contract and left the 10-year yield unchanged at 1.168%. The yield on longer-dated 30-year bonds rose to the highest in two months as investors breathed a cautious sigh of relief over the health of the recovering economy as post-earthquake business activity tries to find its feet.
Australian bills – A healthy employment gain of 23,000 was firmer than expected and driven by full-time employment gains. However, a back-looking revision to the may report reversed a gain reported last month and left the overall rate of unemployment unchanged at 4.9%. With money traders having recently shifted position from one-side of the bed to the other in terms of now expecting the RBA to cut official short-term rates rather than raise them, the response in the bill market was muted. Implied three-month yields rose by just three basis points with expirations out through June 2012 remaining pinned below 5%. The chances of a reduction in policy according to current implied pricing in the swap markets currently rests at 34% compared to 42% earlier in the week. Bond yields added three basis points in Australia with the benchmark 10-year rising to 5.20%.
Canadian bills – The Canadian yield curve steepened after the ADP report weighed on the U.S. yield curve. Canada releases its June employment report ahead of the U.S. report on Friday and in response to the firmer private sector reading on Thursday, dealers locked in to the current rate structure by selling bills sending implied yields higher by up to four basis points along the curve. The yield on the Canadian 10-year government bond rose at half the pace shown by comparable treasuries affording a wider spread, which today moved out to 10 basis points.
British gilts – The Bank of England maintained its static policy and unlike its global counterparts fails to deliver a post-meeting assessment of its actions. The Bank of course has been under less fire lately from inflation-hawks concerned that with consumer prices raging at twice the Bank’s 2% target, inflation is out-of-hand. The recent downturn in activity and a cool-off in inflation pressures worldwide have supported the Bank’s position. Short sterling futures fell in sympathy with the Eurodollar market overlooking some of the optimism displayed by Euribor futures. The gilt future expiring in September slumped by a half point on Thursday lifting the yield by four basis points to 3.28%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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