U.S., European and Japanese bond prices have each made new weekly lows on Friday morning as investors shun the need for the safety of fixed income following signs that the double-dipper crew is being forced to take a break from predicting more recession. Yields are rising by the most in six months to end the week on a sour note for bonds.
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Eurodollar futures – U.S. 10-year yields have risen by 11 basis points on the week and are set to close at around 2.80% compared to a recent slide to 2.42% in the last week of August. The reversal in deferred Eurodollar contracts continues uninterrupted today with the 2012 strip showing a five basis point rise in implied yields. The contract expiring in December 2012 touched its lowest point at 98.25 (1.75%) since August 10 as rate expectations take something of a beating today. The most recent slide started after the contract reached a high on Wednesday at 98.515 (1.485%) and adds a full quarter point on rate expectations. Two-year treasury yields rose seven basis points this week to stand at 0.58%.
Japanese bonds –The rise in the cost of government debt sales rose for a third week in a row as the December JGB contract slumped 46 ticks to 141.16 where the yield rose to 1.145%. Second quarter growth data released overnight was up a tiny amount on a provisional forecast while machinery tool orders surged last month. Producer prices were unexpectedly static through August on a monthly and annualized basis calming fears that prices would continue to deflate. The fact that they didn’t harmed fixed income prices, which grow in appeal in an environment of falling prices.
Australian bills – Strong import data out of China was enough to persuade investors that things might once again be looking firmer in Australia’s biggest export market. Implied yields rose a further four basis points according to price declines evident in 90-day bill futures prices. Government bond prices decayed sending the yield higher by four basis points to 5.031%. Pressure on money market yields has been reinforced by a recovery in the value of the Australian dollar and is inherent in firm employment data released earlier in the week. Both signal an increasing likelihood that the RBA has more wiggle room in monetary policy nowadays. Its efforts to cool the economy were temporarily thwarted by a sharp drop-off in economic activity especially in North America.
Canadian bills – An unexpectedly sharp gain in payrolls at Canadian employers during August could easily have triggered expectations of further monetary tightening at the Bank of Canada. The report showed a jump in full-time employment leading to a net employment change of 35,800 for the month. However, as more people joined the labor market, the rate of unemployment rose to 8.1% perhaps comforting for investors concerned over more calls for tighter policy. Bill prices are just now giving up an earlier gain on the day and stand unchanged on Thursday’s trading while a resilient government bond futures contract remains in positive territory sending yields down by a pip to 2.943%.
European bond markets – Bunds continue to look pretty sick on the chart after a relentless run higher in prices ended this week. December bunds are lower by 70 ticks at 130.08 and not a million miles short of the bear flag target I indicated in yesterday’s brief. The pattern took slightly longer to break, but the move is clear on the charts. ECB chief Trichet noted the difficulty of weaning European banks off emergency lending programs, while another member warned on further disruptions to financial markets presumably should banks encounter further difficulties. Overall it’s a bad scenario for bunds where yields rose again to 2.37%.
British gilts – Losses for short sterling futures appear to accelerating into the close for the weekend, despite a lull in producer prices in today’s data. Input prices unexpectedly declined while output prices didn’t rise as far as analysts had predicted ahead of the report. December gilts fell sharply with the contract currently down by 67 ticks at 122.49 yielding 3.093%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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