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.
European bond markets – European leaders will rehash earlier proposals to aid Greece on Thursday with market hopes now running high for resolution to the 15-month old crisis. Spreads between core and peripheral bonds narrowed sharply for a second day. The tone to Spanish and Italian bond markets improved rapidly on Tuesday and Wednesday’s double-digit retreat in yields was met by a nine basis point jump in German bund yields. The result was a convergence in yields of close to 25 basis points for both nations. September bund futures slid by almost an entire point to trade at 128.10. German producer prices for June edged marginally ahead of expectations although the annual pace of acceleration eased from 6.1% to 5.6%.
British gilts – The 7-2 vote to maintain unchanged short-term interest rates earlier in July was as expected but prompted some selling across the short sterling futures strip. Futures faced minor losses in concert with selling of euribor futures as continental fears subsided. What was missing from the minutes of the Monetary Policy Committee’s minutes was deeper support for expanding the proposition in favor of quantitative easing. In June there seemed to be support for Adam Posen’s long-held position that the asset purchase program should be widened. This month his notion received short shrift. September gilt futures lost just 23 ticks to 123.12 with the cash yield adding three pips to 3.07%.
Australian bills –Aussie bill prices had little reason to remain as optimistic overnight, not necessarily on account of any change in domestic data, but simply because the perceived risks to Europe edged lower. Futures faced a slide with implied yields adding nine basis points while the 10-year government bond fell adding eight basis points to the yield of 4.96%. Domestic data was steady with a DEWR skilled vacancy index of Internet job postings unchanged for a second month, hinting at a constrained labor market. A Westpac leading index looking six months forward turned mildly south for a drop of -0.1%.
Japanese bonds – Investors sold bonds ahead of a large auction later in the week and as stocks recovered on a groundswell of optimism that European policy makers will underpin Greece at a Thursday meeting of officials. September JGB futures faced a decline of six ticks to 141.71 lifting the yield to 1.075%. Convenience store sales jumped by 9% during June compared to a year ago while a leading index of economic activity eased by two-tenths to 99.6. The index is meant to predict activity six months forward.
NOTE: Andrew will be taking time off over the next week. This will be the last interest rates update until Wednesday July 27.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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