Yield curves take back fear-driven gains

There was a muted response to the third-straight reading of contraction amongst manufacturers across the Empire State. While the dollar’s slide was notable, there was little left for the treasury market to do other than unwind a slim loss. Bond dealers are likely going to have to accept smaller daily ranges and perhaps lower volatility after the Federal Reserve outlawed discussion of tighter monetary policy at last week’s meeting. And that means that with permanently low yields a fixation of the bond markets, price-moving data is likely to be harder to come by.

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Eurodollar futures – The September Treasury note future was trading down by just one tick at 129-27 on Monday as investors mulled over the impact of the New York Fed’s latest reading of factory activity across Southern Connecticut, New Jersey and the New York areas. The reading was expected to return from two monthly readings depicting economic slowdown to back above the zero line separating expansion from a contraction. The report barely managed to erase an earlier loss, but who can blame dealers following a week in which the yield on the 10-year benchmark slumped by 30 basis points? Drumming up an appetite to buy is likely to prove hard work unless materially weaker data transpires, and of course a soothing jump in benchmark equity indices doesn’t argue for lower yields at this point. Eurodollar futures are higher at the front end of the curve as liquidity concerns wear thin, while longer-dated contracts are a pip lower. The 10-year note currently yields 2.265%.

European bond markets – Hopes for containment of the debt crisis are unusually high ahead of Tuesday’s Merkel-Sarkozy summit. EU monetary affairs commissioner Olli Rehn told reporters over the weekend that he doesn’t expect that some of the Eurozone’s larger nations will need additional borrowings because they have taken the necessary steps to rein in wayward budget deficits and spur growth. Recent market dislocation would appear to disagree with part two of his outlook and you can ask the British audience how they feel about the impact of fiscal austerity on growth. German yields marked time ahead of the meeting remaining at 2.328% while the more settled tone saw sellers hit the euribor strip for a good eight basis points.

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