Government bond prices continued to look tired following a stellar multi-week run higher in response to growing fears for the health of the global economy should Europe’s debt crisis worsen. Peripheral bond prices recovered and the single currency advanced propelled by investors chomping at the bit to buy equities following a slew of losses. Short-end interest rate futures edged lower as fears subsided ahead of a critical European summit on Thursday on hopes that someone holds the keys to the deadlock harnessing the near-default of Greece.
Eurodollar futures – Bond yields rose but prices rebounded from earlier lows as sentiment towards some kind of breakthrough resolution for Europe’s sovereign debt crisis fluctuated. Benchmark treasury yields rebounded from a sharper sell off as risk appetite gained momentum as European stocks rose. The benchmark 10-year yield at its peak on Tuesday reached 2.97% following news that housing starts surged by 14.6% last month to an annualized pace of 629,000. Apparently supportive of a construction rebound was a similar boost in building permits used as a gauge of future activity. Eurodollars eased by a couple of basis points after the strip had surged in recent days.
European bond markets – German Chancellor Angela Merkel attempted to dull growing expectations for a fast-ticket solution coming out of Thursday’s EU summit. Ms. Merkel warned not to expect European leaders to resolve the crisis “tomorrow” in a single “spectacular” step. Peripheral spreads narrowed sharply having reached record peaks on Monday as fears that contagion would soon drag down Italy and Spain. Both governments’ benchmark bonds reached euro-era record highs on Monday. But comments from ECB member Nowotny helped soothe worries when he said that the ECB wished to avoid at all costs a situation in which it could not accept Greek bonds as acceptable collateral. German 10-year yields rose by five basis points to 2.70% while the yield on Iberian debt collapsed by around 25 basis points as investors gave a collective sigh of relief. Short-dated euribor futures eased by four-or-five basis points.
Canadian bills – There was some hope ahead of Tuesday’s Canadian central bank meeting that officials might drop a desire to tighten policy in the future. The Bank has kept fixed income investors on a string for several months indicating that it must at some point remove its overly generous monetary stimulus. In the event it dropped the word “eventually” from its accompanying policy statement, but otherwise maintained its view that the domestic economy would require moderation going forward. The threats facing central bankers originate outside of the Canadian borders. U.S. debt-wrangling and elevated sovereign debt fears across the Atlantic have prevented it from changing its short-term interest rate setting recently and it has maintained an unchanged stance since September. While the Bank of Canada noted that any further changes to policy must be “carefully considered” dealers sold Canadian bill futures heavily as fears for everlasting neutrality were dashed. The year-end contract fell by 10 basis points to 98.52 implying a three-month cash rate of 1.48%. The government bond future recovered from a sharp loss of 62 ticks to 126.01 with the yield adding six basis points to 2.92%.
British gilts – Short sterling futures slipped by five ticks at deferred expirations in London as sovereign debt fears were soothed on the continent. Gilt futures expiring in September fell by 26 ticks to 123.33 paring a deeper decline earlier in the session with the yield rising by four basis points to 3.06%.
Australian bills – Following a surge in Aussie bill prices over the past several weeks, investors took profits after the release of July minutes from the Reserve Bank of Australia published Tuesday. The Bank said it would be prudent in light of more recent data to spend time assessing the impact on inflation pressures in the future. There was, however, no disappointment with the report and implied yields likely rose in response to a revival of risk appetite as shown by rising equity benchmarks around the region. Government bond prices fell lifting the 10-year yield by five basis points to 4.90%.
Japanese bonds – Despite the rebound for stocks on Tuesday, there was little respite for a rising Japanese yen, which remains below ¥79.00 per dollar. Yen strength crimps demand for Japanese exports and harms exporters’ earnings. Given the potential towering in the background for an escalation of Europe’s debt crisis, investors are having a hard time relinquishing the allure of government bonds. The September JGB future rose by six ticks to 141.68 while the 10-year yield shed two basis points to its lowest since November at 1.063%.