Monday June 28, 2010

Investors once again bought core government bonds after the G20 reiterated the fragile and uneven nature of the global economic recovery. The appeal of fixed income payments was also heightened in this benign inflationary period as the message emanating from leaders of leading world nations included a pledge to halve deficits within three years. Inherently that means lower government outlays and therefore less issuance putting bonds as increasingly scarce commodities. The overriding theme is that if Europe sticks to plan, it will surely mean that the modest global growth everyone is talking about will indeed be the outcome. In turn that leaves little room for monetary policy, further increasing the appeal of fixed coupon payments.

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Eurodollar futures – Treasury yields fell on the above story on Monday morning as investors drove the 10-year note to its highest in almost 13 months as yields reached 3.06%. Personal spending data released by the Commerce Department indicate that consumers were increasingly confident in the recovery and perhaps the outlook for employment. Spending in May rose 0.2% on the previous month – twice the expected pace of gain. Meanwhile in a separate report the Chicago Fed national activity index slipped despite predictions for a gain. Eurodollar futures continue to predict a benign outlook for monetary policy with the G20 statement acting as a springboard today for further price gains of around four basis points.

European bond markets – Auctions by Belgium and Italy today drew enough investor interest but only at less favorable prices. As a result German bund prices continued to rise sending yields down to 2.59% while peripheral European bond prices fell. Spanish 10-year yields added seven basis points to yield 4.53% while those of Italy also rose by five basis points to yield 4.12%. This week marks the end of the first half of the year meaning that €440 billion worth of loans advanced by the ECB in December is keeping the ever-tightening money market on tenterhooks. Nervousness between banks concerned over the risk of lending to one-another means Libors have recently crept higher. The ECB will most likely alleviate problems by rolling over maturing loans. Euribor futures are heading marginally lower today while the September bund future is pushing on the ceiling last trading at 129.22 for a positive change on the day of 25 ticks.

British gilt –British debt markets are seemingly in a safe place these days. The recent budget has done enough to convince the ratings agencies that the government will take a firm line on spending, while investors can see a shrinking issuance of British bonds coming to the market over the next few years. The marginal seven tick gain for the September gilt contract has the 10-year yield unchanged at 3.38% while short sterling is enjoying a three tick rally on the benign outlook for inflation.

Japanese bonds – Japanese government bond yields rose by one basis point despite a poorly performing Nikkei stock index overnight. The recently appointed Prime Minister vowed to eliminate the budget deficit over the course of a decade spearheaded by spending cuts. The 10-year yields rose to 1.139%.

Canadian bills –Canadian bonds are trading higher again this morning although trying to maintain pace with U.S. treasury notes remains a hard task. The yield spread between the two remains at 11 basis points due to the fact that the Canadian economy faces greater recovery prospects on account of pockets of global economic strength where demand for its commodity resources is evident. The recent head towards the exit by the Bank of Canada is still a threat but investors have to pit such impetus against risks emanating from Europe and even modest demand in the United States. The September government bond trades today at 122.93 and is 38 pips higher today. Bills are matching gains for Eurodollars.

Australian bills – Aussie 1-0year yields inched lower in response to the G20 statement sending the yield down to 5.22%. Bill prices also edged five basis points higher as implied short-term yields fell.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

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Andrew Wilkinson

Tags: Andrew Wilkinson, Bonds, Interest

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