Global yields plunged again on Tuesday in response to evidence of lackluster global growth as traders used the excuse of spending cuts agreed within the move to extend the debt ceiling for the U.S. as reason to expect further economic contraction. The coincident signs of economic headwinds were served up on Monday in the shape of manufacturing surveys showing the challenge to factory owners. We’ll learn more about the service sector throughout the remainder of the trading week and ahead of critical employment reports in the both the U.S. and Canada. It’s also central bank week although few have room for further policy easing, with some observers considering whether some might have been too swift to act by tightening policy already.
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Australian bills – Money traders were shocked by the RBA’s sensitivity to growth prospects outside of the nation following its decision to leave its policy settings unchanged for an eighth-straight meeting. Implied yields slid by around 33 basis points at all expirations beyond March next year while that on the nearby December futures contract slid by 28 basis points. The Bank has to an extent wrong-footed the cash market by continually sounding tough over the threat of inflation and has repeatedly threatened to tighten policy. Its caveat has for long enough, however, been the threat to external growth from a slowing global economy. The reaction in the bill market was sizeable but was accompanied for the first time in more than two years by a slump in the 10-year benchmark government bond yield beneath its 4.75% short-term policy setting. Traders can no longer envisage a policy tightening over the remainder of the year with cash markets responding further by predicting the potential for a policy easing should global conditions continue to weaken.
British gilts – U.K. government gilts have so far this year delivered better gains than either U.S. treasuries or German bunds. British yields have tumbled as investors recognized just how slow the economy was inching in light of a radical approach to a fiscal shortfall. Earlier in the week the CBI pared its forecast for 2011 growth to 1.3% while raising the question over where it expects next year’s 2.2% projection to stem from. The pattern of trading across the short sterling futures strip was similar to that in the Eurodollar market where nearby expirations saw implied yields rise at the margin while those on deferred maturities eased as tensions grew across peripheral areas of the continent. The 10-year government yield eased to a record low at 2.76% as gilt prices peaked during the day.