Sovereign debt honeymoon comes to crashing end

British gilts - The yield curve edged lower supported by the fallout in the Eurozone, while further evidence of economic pessimism was served up in a retail trade survey indicating a bleak outlook by store operators. September gilt futures surged by around one full point to 123.94 lowering the 10-year cash yield by nine basis points to 2.97% following a slump in retailers’ optimism during July. Respondents turned bearish on the outlook for sales with the balance of sellers turning the index in to negative territory to read negative 16 following a positive June return of 16. Short sterling futures moved higher sending implied yields lower as the yield curve continued to narrow by around seven basis points.

Australian bills - Aussie bill prices slumped in response to a report that some dealers fear will force the central bank to pick up the monetary reins and further tighten policy as the year progresses. The quarterly consumer prices index rose by 0.9% during the three months ending June to a yearly pace of 3.6% and faster than the 3.3% pace in the first quarter of the year. Clothing costs rose at the time by the most in three years, while transport costs rose to a three-year high. Food costs have risen for three consecutive quarters prompted largely by crop shortages following earlier devastating cyclones and flooding. The government dumbed down the report saying that agricultural output would eventually rebound and would alleviate tightening import prices. Interest rate traders were not in compromising mood especially as confidence in a global growth rebound appeared to be on the rise. Bill futures slumped by close to 20 basis points along the strip as borrowers locked in to a yield structure forecasting lower rates ahead. Likewise the yields on two-year government debt rose by 12 basis points to 4.49% for the biggest increase in five months, while 10-year bonds fell sending the yield up by one basis point to 4.93%.

Canadian bills - Bill futures moved in the opposite direction to Eurodollar futures following a report showing weakness in durable goods orders in the United States and Canada’s largest export haven. Rising concerns for the health of the global economy in the face of political gridlock in Washington and fallout from European sovereign debt concerns pushed thoughts of a Bank of Canada interest rate increase off in to the sunset.

Japanese bonds - Japanese fixed income buyers refused to unload bonds again overnight despite a rebound in optimism among small businesses. An index of confidence rose but failed to dent demand for government paper in light of further upwards pressure on the Japanese yen. The potential for economic weakness among manufacturers and exporters from a strengthening yen weighed heavily especially at the Bank of Japan, where an official hinted at a proactive response to currency appreciation. The 10-year government yield fell by a single basis point to remain close to the lowest point of the year at 1.078%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLc

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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