Bond yields reversed declines inspired by panic-driven trading earlier in the week after Fed Chief Bernanke offered the prospect of another round of quantitative easing should a growth rebound undermine central bankers’ forecasts. The dollar balked at the thought of further easing, which Mr. Bernanke said need not rely only on quantitative easing but could mean cutting the rate paid on banks’ excess reserves in an effort to encourage them to lend.
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Eurodollar futures – The Eurodollar curve seems reluctant to embrace a midweek brush-off for risk aversion with lead contracts refusing to rally for fear of further liquidity pressures ahead. Year-end three-month futures trading at 0.49% still indicate that investors’ fears haven’t died down despite a solid jump in global equity prices. The timely revelation of lively discussion between FOMC members over the need for further monetary easing coincided with Bernanke’s testimony at Capitol Hill. Mr. Bernanke said he expects growth to pick-up, but says that if the Fed is wrong in its growth assumptions the FOMC has a variety of tools to help spur activity in an effort to boost employment. Implied yields declined by increasing amounts along the Eurodollar curve while the September treasury-note futures contract was lower by 12-ticks following his remarks and partially in response to a calmer session for European government bonds. The yield rose for a second day having reached 2.81% for a seven-month low on Tuesday. The reliance on low interest rates to spur activity was exemplified in the weekly MBA mortgage activity indices where a challenged housing market failed to spark either purchase or refinancing activity despite a slide in borrowing cost last week.
European bond markets – ECB interference in crucial peripheral government bonds has played a crucial role in soothing nervousness building ahead of Italian debt auctions later in the week. Yields on benchmark Spanish and Italian debt eased while German bunds fell adding three pips to yield 2.73%. There was encouraging news from a German wholesale price report for June showing a decline of 0.6% between months allowing the annual pace to slip four-tenths to 8.5%. Euribor futures edged forward at deferred maturities although sensitivity remained to nearby futures as liquidity pressures played a role.