A weakening in the pace of manufacturing expansion in the U.S. confirmed a snapshot taken earlier in the day from other major economies. The rather ironic exception was within the Eurozone where the pace of factory output expansion stood still possibly reflecting the substantial devaluation of the euro this year. All told, conditions were ripe today for another pop-higher in bond prices creating lower yields. We have to look back to March 2009 to see when 10-year treasury yields last snook beneath 2.90%. The toll to be paid today, however, is with the U.S. dollar, which has suffered mightily at the hands of surges in the euro and yen. The inevitable rise in interest rates at the onset of recovery suddenly looks an awfully long way off.
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European bond markets – The European money markets are altogether in a funny mood on Thursday. Today marks the repayment date for expiring one-year loans on behalf of Eurozone borrowers back to the ECB. Yesterday demand for three-month cash was relatively light while today’s offer of one-week cash was equally slim. All told, there appears to be a draining of liquidity from the system. But one has to remember that this is a demand driven problem and perhaps better phrased as a demand deficient situation. The perception remains that banks will have a hard time finding sufficient liquidity. Wary of lending to one another for fear that counterparties might disappear like ships into the night, dealers perceive higher cash rates are here to stay. Euribor futures sank 10 ticks – a huge intraday move for the contract and reflecting the possibility that the yield curve will steepen. Already the contract is making a comeback. September bunds are firmer after the U.S. ISM index with yields falling after an earlier snapback. The contract is trading in positive territory at 129.45 implying a yield of 2.56%.
Eurodollar futures – The spike in the September treasury note futures contract lifted the price to 123-01 following the weaker than expected out turn for the June ISM report. Eurodollar futures are mixed given that all contracts one-year forward from today reflect a three-month cash rate beneath 1%. Safe to say, the Fed is on hold as dealers wonder whether its “moderate” view of the economy is perhaps too optimistic.
British gilt – The U.K. version of the PMI manufacturing data showed an inline decline to 57.5 after a reading of 58.0 in May. Short sterling futures are off earlier lows associated with the tightening in European cash rates but still show a net loss of one tick on the day. September gilts are nevertheless 40 ticks better off at 121.45 to yield 3.32%.
Japanese bonds – The loss of confidence in the Chinese export recovery was evident today sending Japanese yields at the 10-year down to 1.049% with the September future adding 12 ticks to 141.78. The Chinese PMI for Jun read 52.1 after 53.9 with a reading above 50 indicating expansion.
Canadian bills –Markets are closed for Canadian Independence Day.
Australian bills – Aussie 10-year yields responded to weakness in Pacific equity markets and dropped one basis point to 5.068%. The 90-day bill contracts rallied by around five basis points following a dampened retail sales reading for May.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
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