The demand for cash among European banks might be easing according to the far smaller allocation from the ECB on Wednesday as 12-month loans came due, but it didn’t alleviate the economic fears that have driven bond yields around the world down to multi-month lows. A precursory employment report for the U.S. today showed private employers added fewer jobs than was expected fanning more of those double-dip recession fears that gripped the market following a revision to a leading index of Chinese activity.

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European bond markets – Fears have mounted that banks would be left short of interbank funds when they repay the ECB some €442 billion in maturing loans on Thursday. However, banks only applied for €131.9 billion in fresh loans indicating that perhaps some banks had joined in the borrowing binge last year for the pure sake of putting the money to work in other capital markets. Although the slacker pace of today’s borrowing is a slight relief, the cash market continues to function poorly with quality of counterparts remaining the ultimate arbiter of who gets to borrow.

Euribor interest rate futures edged lower in price to reflect slight upwards pressure on funding costs with the strip down by around two basis points. September bunds were flat ahead of the U.S. ADP report and have subsequently reached an intraday peak at 129.68.   

Eurodollar futures – Some of the bond-buying impetus was stymied following the Chicago ISM purchasing managers report, which showed just a tad short of the expected weakness dealers had priced in. The pace of expansion continues albeit at a slower pace.  Ten-year treasury yields rose by one basis point to 2.96% while Eurodollar futures are up one tick at shorter maturities and down one at deferred expirations.

British gilt – Gilt prices continue to feel well supported with the September futures contract holding onto a 37 tick gain to 121.05. An earlier slip in consumer confidence data maybe partially behind the move. However, the ongoing relief rally is courtesy of a well-received emergency budget that has kept overseas buyers flocking to the higher yielding British treasury debt market. Short sterling futures are broadly unchanged.

Japanese bonds – Weakness in Asian markets following through on the hefty U.S. equity market losses maintained a bid for government debt on Wednesday, with yields continuing to erode. The 10-year JGB future rallied to 141.63 for a 16-tick improvement while the buyers shaved the yield by three basis points to 1.071%. The heady value of the Japanese yen and its impact on exporters also helped boost the appeal of bonds.

Canadian bills –Data for April showing an unchanged pace of output growth for the Canadian economy harmed both the domestic dollar and sent bond yields lower once again. Investors had assumed that the economy would expand at a monthly pace of 0.2%. The bill market also implied lower rates looking ahead, further downplaying the need for the Bank of Canada to step up its restrictive monetary stance. September bond futures gained to reach a session high at 124.08 before paring gains after the U.S. ISM data. Meanwhile the spread between U.S. and Canadian 10-year bonds narrowed once again to just nine basis points this morning.

Australian bills – Aussie 10-year yields continued to fall despite positive bank lending data and a continuation in the rally for housing prices. The 10-year government yield eased by a further five pips to 5.08% while 90-day bills rallied by seven basis points.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

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Andrew Wilkinson

Tags: Andrew Wilkinson, Bonds, Interest Rates

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