Stock rebound trips-up bonds

Some of the recent enthusiasm for global short-end futures was undone midweek as equity markets underwent a strong rebound. Yet the fall in government bond prices was only a mild one where yield remained depressed with a gloomier bigger picture in which investors are itching to hear the shape of government and central bank response.

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Eurodollar futures – The benchmark 10-year government bond yield added six basis points as equity indices staged a 3% response to Tuesday’s near-5% slide. Economic data was mixed with first-time initial claims through last weekend rising by 395,000 suggesting the labor market hasn’t yet weakened in response to the latest crisis of investor confidence. On the other hand a widening of the trade deficit in June suggested that overseas buyers were uninspired by a softer dollar that month with U.S. exports facing a malaise. Imports fell, on account of a declining energy bill but by less than the drop-off in exports, forcing the deficit to widen unexpectedly to $53.1 billion. The dramatic recent slump in the U.S. yield curve changed little except for a minor parallel price shift lower across the Eurodollar complex by around five basis points. The September Treasury note future had the opportunity earlier to test overhead resistance as equity index futures slumped. However, the slide ran out of steam and bonds reversed course leaving the contract close to session lows where it recently traded at 122-18. A half-point loss on the day lifted its yield to 2.20%.

European bond markets – French stock prices swung from a gain to a loss on renewed banking sector fears before the Elysees palace announced that President Sarkozy would meet with German Chancellor Merkel to discuss recent financial market follies. That seemed to change the tone, perhaps because the meeting is not imminent but rather will take place after the weekend and presumably when markets may have calmed. While most economic releases might have been overlooked in this headline-driven environment, German bund fell by 80 ticks with the September contract trading at 133.32 as its yield jumped by 12 pips to 2.31%. The calmer tone to equity prices also alleviated pressure on peripheral nations’ debt prices. Italian and Spanish bond rose causing a narrowing relative to safer German debt.

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