Bond reversal continues

A rising tide of corporate earnings has lifted investors’ appetite for equities causing a rotation out of conservative government bonds. Advancing stocks and signs that a “Gang of Six” plan to reduce the nation’s deficit has found bipartisan support has tipped treasury prices over the edge. Hopes that European finance chiefs will review objections to previously mulled plans to aid Europe’s weak spots is also souring demand for core European bonds as yields take a leg higher.

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Eurodollar futures – Despite an unexpected slip to a seven-month low for existing home sales during June, bond prices continued to fall midweek leaving yields 12 basis points above last week’s low-water mark 2.81% for benchmark treasuries. An earlier report showed strength in construction going against the grain in terms of a slew of evidence restraining a housing recovery. Last week’s MBA mortgage application data showed that purchase applications were dead in the water while refinancing moved up to 70% of all activity for the highest slice of the pie since January. Eurodollar futures responded to a soother tone to the European sovereign debt crisis with nearby futures advancing as liquidity fears tapered off, while deferred contracts fell causing a widening of the yield curve by eight basis points from the current December expiration through December 2013. Treasury futures expiring in September trudged the session low in late-morning trade at 124-19 with cash 10-year notes trading at 2.93%.

Canadian bills – The fallout at the back-end of the Eurodollar prompted further selling across the entire 90-day bill complex in Montreal. Contracts expiring beyond one-year forward saw implied yields rise by seven basis points while government bond futures expiring in September fell by one-half point to trade at 125.81 carrying a yield of 2.94% as its yield crossed back above those available on comparable treasuries. A jump in wholesale sales during May prompted dealers to lock-in to low yields and sell bill futures for a second day after the bank of Canada refused to let go of its tightening bias. The yield on the December 2012 bill future has now risen from 1.38% ahead of the July monetary policy decision to 1.53%. As mentioned above the fading liquidity issues dogging U.S. dollar Libors has also inspired a rebound for nearby Eurodollar futures with the spread between the two crossing back above 100 basis points today. Earlier in the week European contagion fears had forced a narrowing in the spread to just 83 basis points.

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