Credit Markets Take Cautious View of Risk Recovery

A fading rebound for risk is having remarkably little impact on treasury yields on Tuesday, although bond prices remain in the red. Commodity prices are on the rebound with crude oil futures feeling the full force of a Goldman Sachs “buy” along with other key commodities whose values have slumped on account of a bursting of growth hopes. The low yield environment that follows on from a popping of the commodity bubble is unlikely to make a sharp exit with investors more likely to retain an eye on this built-in health indicator going forward.

Eurodollar futures – Eurodollar futures are barely changed and reflect either higher or lower implieds depending on how far you care to peruse down the strip. Short-end yields are a tad lower while yields along in the 2013 strip have risen by a couple of basis points. There was little response to a firming in new home sales during April where an 8% increase lifted the annual pace to 323,000. Nevertheless there was scant cause for jubilation given that sales fell 23.1% from the end of last year’s tax-break for new home buyers. I think it remains pretty clear that the bleeding in the sector hasn’t yet abated in light of last week’s news that 37% of overall sales during April were forced. It therefore seems understandable that June notes are paying little attention to the data and have pared session losses to just two ticks where they stand at 122-30.

European bond markets – Euribor futures are marginally lower implying a slight uptick in yields. However, very little has changed in terms of the reining in investors’ fears over sovereign debt. An earlier bubbly reading for German investor confidence set a darker tone for German bund prices sending yields into retreat from a four-month low. Yet Portuguese benchmark yields today rose to the highest level since the euro was formed in 1999, while a warning over a possible downgrade from Fitch for Belgian debt keeps investors’ nerves jangling. June bunds recently slipped to a session low at 124.71 lifting the 10-year yield to 3.06%.

British gilts – Short-term interest rate futures have bounced by five basis points from session lows following a cautious resumption to risk. An earlier government report illustrated the difficulty with trying to reduce a towering budget deficit in light of challenges to growth. A swinging-axe in the public sector coupled with sizeable spending cuts is the wrong mix to achieve a fiscal deficit reduction, but Chancellor Osbourne can only claim that he never dealt that hand of cards. Bank of England Markets Director Paul Fisher also delivered a dovish speech reiterating what Chief Economist Spencer Dale said over the weekend in that the economic engines could quite easily misfire. For his part Mr. Dale stated that further stimulus might yet be needed, which is something MPC member Adam Posen has repeatedly called for at the last year’s monthly vote. June government gilt futures conveniently filled the gap I pointed out yesterday to 120.92 sending yields ay the 10-year part of the curve up to 3.32%.

Canadian bills – Traders returning from a domestic holiday bought 90-day bill futures sending the December contract to its highest price since March 16 in the midst of the Japanese tsunami crisis. Traders have pared bets on the timing and extent of ongoing Bank of Canada monetary tightening as global activity has cooled somewhat and commodity prices at least partially removed inflationary pressures. Governor Carney has promised to adopt a cautious tone in considering further rate increases while his deputy Timothy Lane warned last week that the global financial system remains under threat even several years after the credit crisis owing to weakness in balance sheets and a prolonged era of lax monetary policy that might spur risky investment practices. June government bond futures are unchanged following a long weekend and recently traded at 123.01 to yield 3.12%.

Japanese bonds – Japanese government bond prices remained firm, however, with dealers finding little enough reason to argue that yields would rise anytime soon given the lack of health within the domestic economy. JGB futures expiring in June slipped by just two ticks to 140.77 failing at 140.92 earlier in the day to close yielding 1.115%.

Australian bills – A rebound for commodity prices and a bullish call from Goldman Sachs claiming that China’s soft-patch for growth may soon be over spurred riskier bets and helped depress interest rate markets. Implied bill yields added two basis points as the region’s equity markets climbed and currency investors looked favorably on the local dollar. Bond yields in Australia added three basis points to close at 5.29%.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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