Eurodollar futures – At the end of May the September 2011/September 2012 calendar spread was trading at around 60 basis points. With two more employment reports under their belt traders have flattened the yield curve on the view that global fears among investors are worsening and that the Fed’s hopes for second-half growth resurgence might be premature. The gap between the two contracts narrowed to 30-basis points Monday as liquidity fears resurfaced in Europe. Italian authorities moved to stem short-selling after the local market slid with banking shares hit hard. Investors dumped shares of local banks most exposed to Italian government debt. Italy has €1.9 trillion of paper outstanding and more than the German level of €1.1 trillion. Bond traders took no chances that rising funding costs at forthcoming auctions could accelerate the crisis and sold Italian bonds. Fears that the crisis might create a liquidity crisis in the cash market saw front month Eurodollars fall as implied yields for September rose to 0.5% or twice the level where three-month dollar Libor recently traded. The yield on September notes dipped to 2.96% as concerns mounted over global economic health.
Canadian bills –Canada doesn’t suffer from the same liquidity pressures as does the United States when it comes to banks scrambling for cash. Implied yields declined across the bill curve with BAX contracts rising from two pips at the near-end to 12 basis points at expirations one-year forward and beyond. Canadian government bonds rose neatly albeit at a lesser pace than benchmark treasuries. The September bond future advanced by one-half point shaving four basis points off the 10-year cost of borrowing to 2.92%. The yield premium enjoyed by the Canadian government narrowed to just three basis points on Monday.
Japanese bonds –Asian stocks were destined to slide on Monday, assured by weak June employment report that shocked U.S. bond investors on Friday. The MSCI Asia Pacific index declined by 1% while pressure on the euro currency cleared the way for fresh hurdles for European traders. Adding to pressures was worse-than-forecast Chinese inflation. A weekend report showed that consumer prices advanced during June by 6.4% setting off a second-wave of monetary tightening fears for the world’s second largest nation. Investors ignored a healthy rise in machine tool orders last month further supporting hopes for domestic recovery. The year-on-year pace picked up to 53.3% while a separate reading of consumer confidence rose ahead of the previous month. The yield on Japan’s 10-year benchmark slid to 1.135% as the September JGB future advanced by 55 ticks to 141.13.
Australian bills – No matter how divided Aussie money traders remain over the next likely move from the Reserve Bank of Australia, the current drive towards easier monetary policy around the world has taken hold in the local market. Bill futures surged overnight with implied yields sliding close to 20 basis points. Investors responded to resurgent fears of Chinese monetary tightening by concluding that if that eventuality plays out, regional growth would slow and deliver the desired slowdown in inflation too. Money traders also bought bill futures in response to the weakness shown in the June payroll data on Friday. It’s hard work for Australian economy bulls who are having to swallow declining yields at a time when certain reports are pointing to an otherwise healthy domestic economy. Home loan data for May showed a healthy 4.4% increase, the second such pace of gain. Government bond yields crashed 15 basis points lower to 5.02% matching the lowest seen just ahead of the recent Greek vote.
Andrew Wilkinson is a Senior market Analyst at Interactive Brokers LLC
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