British gilts – A downside revision to British growth for 2012 at 2% still looks mightily optimistic, which possibly explains a strong performance for the September gilt contract. The Bank of England in its quarterly report shaved 0.5% off next year’s growth rate and warned that inflation in the near-term might yet reach 5% further squeezing household finances. It also predicted that in the medium-term inflation would fall below target, justifying its maintenance of its 0.5% short-rate. Monetary policy can’t deliver all the goods necessary to restore growth claimed Governor King. Short sterling prices jumped by 20 basis points at deferred maturities, while nearby contracts saw implied yields dip by half as much.
Japanese bonds – Upside pressure on the yen maintained downside pressure on Japanese yields as traders wondered whether the Bank of Japan might follow the Fed’s lead in announcing a point in time through at least which it would maintain a zero interest rate. There are growing expectations that the Bank might also intervene for the second time in a week as the yen squeezes the recovery. September JGB futures added 11 ticks to trade at 142.24 sending the yield back down to 1%. An index of activity within the services industry rose 1.9% in June and twice as fast as the prior month.
Australian bills –Bond buyers showed signs of fatigue at an auction of 10-year government bonds midweek with the bid-to-cover ratio drying up to just 1.7-times. The June 21 auction drew bids worth 3.25-times the bonds on issue that day, admittedly at far higher yields. Cash bonds rose by the end of the day with the yield slipping by four basis points to 4.48%. An index of consumer confidence reinforced a worrying domestic situation falling to a two-year low. The Westpac confidence reading slid to 89.6 as global panic warms up. Bill prices added a further 10 basis points with the March 2012 maturity depicting the trough for rates at 3.61% depicting monetary relaxation of more than 1% before then.
Canadian bills – Canadian fixed-income traders trying to keep a finger on the pulse of the American economy had a hard time locating the pulse after the FOMC statement. As the nation’s largest export market, what happens in the world’s largest economy is critical to Canadian manufacturers. The slide in treasury yields was mimicked by the move in Canadian government bonds, but managed a yield decline of just 11 basis points Wednesday. The two-day outperformance of treasuries has cracked open the gap between the 10-year yields forcing those south of the border 15 basis points lower than on those of Canada. The September government bond future added 62 ticks by lunchtime sending the yield down to 2.34% compared to a 2.15% reading on the U.S. issue.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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