Bond Risk Aversion Rally Fades
Some temperate U.S. data and pressure on Spanish and Portuguese bond prices today helped return bonds to the black for the first time in three days, with yields just inching lower. Investors grew nervous over the implications for growth from spending cuts in the Iberian nations and what reduced growth might mean in terms of accessing capital markets down the road. Investors worried that certain governments might just be leading them down a blind alley are once again shunning bonds and causing pressure on yield spreads relative to Germany. Yet the rush into the safety of bonds today certainly doesn't live up to earlier flights to quality with 10-year yields making gains of merely a couple of basis points today. Nor is the shock to equity prices too noteworthy today. The fabric that wove the rug that was pulled from beneath the feet of the euro throughout 2010 is starting to become unraveled.
Eurodollar futures - September treasury note futures are up by about six ticks at 120-02 to yield 3.28%. Yields have risen for three sessions until today. Earlier in the session notes reached a peak at 120-14 after data showed the fastest drop in U.S. housing starts during May in more than a year. Prices paid to producers also declined potentially buying the Federal Reserve longer to maintain an era of low interest rates. While recent external data has helped to disprove the theory that the world is heading for a double-dip recession on account of European budget worries, market chatter is surfacing that the Fed may use next week's FOMC meeting to rein in overly optimistic growth forecasts for 2011.
European bond markets - German bunds have recoiled from an earlier surge to 128.70 after the EU dismissed out of hand an article in El Economista suggesting that the EU, IMF and the U.S. were putting into place a credit line of €250 billion to aid Spain. Bunds are now lower on the day at 128.22. Meanwhile efforts under the tripartite €750 billion accord to buy European government bonds appear to be running aground. The spread over Germany that investors are demanding to hold Spanish debt surged to a record today.
British gilt - Gilts held onto gains even after a rather strong employment report for May along with a revision to April data. The rate of unemployment declined. However, it's more likely that the September gilt future remains higher boosted by optimism that the new coalition government is taking a serious stance earlier rather than later on tackling the budget deficit. Earlier in the day gilt prices jumped to 119.58 after a Nationwide Building Society consumer confidence index fell.
Japanese bonds - Japanese yields rose in response to the growing global body of evidence that the recovery is on track. Stocks rose and bond prices edged lower although strong support for a 20-year issue prevented yields from rising further. Today's 1-0year yield rose to 1.225% as the September JGB futures contract lost eight pips to 140.33.
Canadian bills - Canadian yields fell harder than those in the U.S. today after Governor Mark Carney warned that European volatility detracted from any surety that domestic interest rates would rise. That possibly explains why the Canadian September bond future is sitting close to eth day's high at 121.06 where the yield is five basis points lower at 3.37.
Australian bills - Aussie bill prices fell for the same reason that Japanese bond yields rose. The risk rally or recent days bolstered the Aussie dollar and made a resumption of the RBA's rate-raising policy look more apparent. The 10-year yield added seven basis points to settle the day at 5.41%. |
