Bonds Mark Time

Government bond prices remained stubbornly buoyant despite an ongoing rebound from last week’s 11% slump in global commodity prices. Equity markets too are resilient with investors lifting prices back towards last week’s highs, the best performance in three years. Most investors seem reluctant to shake off their affair with bonds despite what appears to be a buoyant body of evidence that would suggest the onset of inflation and subsequently rising yields.

Eurodollar futures – The yield on benchmark 10-year notes in the U.S. rose by one basis point to just 3.16% remaining overtly confident in the Fed’s observation that the economy isn’t quite there yet. With a recent slippage in growth and despite the best efforts of surging commodity prices to incite the central bank into a war on rising prices, bond buyers show few signs of letting up habits even in the face of three days of supply stretching from three-to-30-years. Eurodollar futures remain in bullish mode indicating the cost of borrowing will remain well below one half of one percent into 2012. June notes today stand just five ticks lower at 122-05 ahead of a three-year auction of debt.

European bond markets – June bunds have been lower throughout the session but have staged a recovery from a low at 123.86 to stand at 124.09 where the 10-year yield added a single basis point to 3.11%. That yield remains five pips below comparable treasuries for now. Fear remains the watchword in European government bond markets after a Greek journal broke the story that the IMF was set to provide a further €100 billion in financial aid to Athens. The 10-year Greek yield slid by 34 basis points on the news as the government is less likely to require reliance on the capital markets should the story prove accurate. Euribor futures traded with a negative tone on an otherwise data-free day with implied three-month yields marginally higher.

British gilts – The strongest outturn of shoppers in five years at Britain’s stores failed to impress economic bears after a BRC report today. An unusual number of public holidays and the warmest April on record helped explain the buoyant report, which conflicted with earlier pessimism from the nation’s largest trade body, the CBI. There is a fair deal of pessimism about the economy on the eve of the Bank of England’s latest economic projections due Wednesday. Based on cuts in government spending yet to work its way through the economy some expect the Bank to lower its growth forecast. There is little impact on short-sterling futures on Tuesday with front months lowering the odds of an early onset of monetary tightening while deferred expirations are lower in price as is the June gilt future, which is nursing a loss of 12 ticks lifting the benchmark 10-year yield to 3.64%.

Canadian bills – Canadian implied three-month yields are roughly higher in line with those on Eurodollar deposits as bills of acceptance futures dip by a couple of basis points. The 10-year government bond fell sharply sending the yield three basis points higher and widened the yield gap above treasuries to three basis points as Canadian yields touched 3.20%.

Japanese bonds – Japanese 10-year bonds continue to creep towards 2011 lows closing Tuesday yielding 1.12% with the June future trading two ticks lower at 140.56. Investors continue to assess the disruption to the national economy on account of the earthquake as they mark growth prospects for the current year lower.

Australian bills – The Australian budget was seemingly well received by investors who bought bill futures in hopes that a reduction in government spending would deter the central bank from tightening so quickly in its aftermath. The government made A$22 billion worth of spending cuts over four years choosing to let a A$76 billion mining boom provide economic stimulus instead. Aussie bond were unchanged ahead of the announcement yielding 5.40% at the 10-year area of the curve.

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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