Yield Rally Gathers Steam After Downbeat Bernanke

Benchmark bond yields continue to push lower in North America winding up for a challenge once more on the lowest in seven months. In Europe the story is a little different ahead of Thursday’s ECB meeting at which speculation has mounted that the central bank will preannounce a July monetary tightening. A downbeat assessment from a trio of Fed members served up a despondent reminder of the dire image that central bankers have of the state of the economy. Later on Wednesday the Beige Book will likely recycle the ailing health of the world’s leading economy.

Eurodollar futures – Were it not for the fact that monetary policy had not already been cut so close to the bone already, one would swear that Chief Bernanke’s words were delivered in advance of another interest rate cut. His downbeat assessment seemingly interwoven with downright irritation at the mercurial pace of recovery is the latest piece of ammunition for bond bulls looking to exert further downwards pressure on the yield curve. The September bond future added a half point to stand at session highs of 123-22 ahead of lunchtime shaving four pips off the 10-year yield to 2.96% and leaving it within a couple of basis points of the lowest since early December. Eurodollar futures were buoyed by Bernanke’s observations that household spending was held back by the Molotov cocktail of a 9.1% reading for unemployment, declining home values and tight credit. The 2013 strip slid by eight basis points as the curve flattened further while nearby contracts saw implied yields decline by three pips.

European bond markets – German bunds took back about half of Tuesday’s losses fuelled by concerns for global recovery. The September contract is challenging the day’s peak at 124.98 with yields at the 10-year four basis points softer and at 3.05% offer a 10-basis point premium to U.S. treasuries. Nevertheless with the potential for the ECB to use progress towards a lasting solution on the Greek sovereign debt issue as collateral for moving forward with monetary tightening, investors’ appetite for fixed income is cautious as shown by a widening premium over treasuries. Nonetheless euribor futures advanced, which seems unusual ahead of the monthly meeting. Implied yields eased by between two and five basis points along the curve as dealers looked at the health of the American economy.

British gilts – Gilts also wiped out Tuesday’s loss and reversed a rise in yields with the benchmark 10-year falling to 3.29%. Short sterling implied yields matched the continental move with the year-end yield slipping to 0.99% after the British Retail Consortium noted that retail activity softened to a 2.3% year-on-year basis in may following a 2.5% gain the month before. Gilts were likely restrained by a warning over Britain’s future loss of its sovereign credit rating by Moody’s. The ratings agency warned that fiscal consolidation could easily get tripped up by a growth undershoot in the years ahead. That, said Moody’s, could cause it to take a different perspective on Britain’s rating although for now it left the outlook pointing to ‘stable.’

Canadian bills – A healthier than hoped for reading for May housing starts meant that an ever-easing Canadian yield curve seemed to begrudge today’s advance for bills and bonds. Yields at the 10-year only managed a one pip decline to 3.02% widening the premium over 10-year treasuries. Bill futures advanced keeping them poised for higher ground with most contracts advancing by two pips.

Japanese bonds – Japanese yields softened by a basis point to 1.14% at the benchmark 10-year as JGB futures expiring in June ran-up to 140.85.

Australian bills – Yields continued to soften at the Australian short end after the Reserve Bank dropped the veiled threat of further tightening “at some point” from its policy statement. Data showed a 1.6% decline in investment lending during April following a revised dip of 0.2% for March according to a report released Wednesday. Previously the data showed a 2.1% rise. The Reserve Bank softened its expectations for inflation prompting investors to play down the chances of a further round of monetary tightening, while they also sounded cautious about investment in non-mining areas. Government bond prices jumped shaving five basis points off the 10-year benchmark to stand at 5.21%.

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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