IST: Bonds Yields Edging Lower On The Week As Risks Rise
Global long ends continue to hold a steady bid at the end of a hectic week that saw U.S. 10-year yields surge as high as 3.60% before sliding back to 3.47%. Ironically, treasury yields have declined on Friday just as further evidence arrives to indicate a growing recovery as consumers spent more for a seventh-straight month. The sovereign debt crisis is now firmly plotted on the radar screen by the southerly tendencies of the euro, which slipped below the manic lows of last week. Traders now seem intent on driving it towards the $1.18 value at which it was launched 11 years ago.
Eurodollar futures - A revision to March retail sales data and a further jump in the reading for April proved the resilience of the U.S. consumer. Some of the gains may have been born out of government stimulus spending, while an uptick in industrial production and an accompanying rise in capacity utilization across the manufacturing sector continue to indicate a stronger recovery.
Notwithstanding this evidence the bias towards fixed income among fearful investors continued at the end of the week where a strong equity recovery has wilted and investors are now closely examining the strings attached to the European lending program. Investors fear slower growth is an almost guaranteed consequence of the European central banks' commitment to shore up domestic government bonds. The strain on growth will therefore come through stringent fiscal austerity cuts.
June treasury futures are up almost a full point at this stage, with investors ignorant of the economic evidence unfolding in front of their eyes. The appeal of fixed coupon payments continues to outweigh such evidence as investors predict that monetary policy tightening will now be inevitably delayed.
British gilt - Despite the weakness in the pound as it remains hindered by the action of the euro, gilt prices continue to accelerate with the 10-year yield slipping to almost the lowest point so far this year. Today the yield slid eight basis points to 3.76% as investors put off the notion of a monetary tightening from the central bank. Deferred short sterling contracts also displayed out sized gains at deferred maturities.
European bond markets – German bunds retain a fearful bid after pressure swirled on the Eurozone. All manner of rumors are on the boil this morning. Media enquiries to various politicians have so far been met with "no comment" after it slipped that French President Sarkozy threatened to quit the euro last weekend should Germany fail to step up to the plate. The dire Eurozone situation appears to be getting worse and splintering from within regardless of external pressure on the euro. June bunds are at the week's peak and don't forget that they sank on Monday following the revelation of the rescue lending plan. German yields dropped six basis points to 2.87% while Greek bond prices started to slip once more alongside debt issued by Spain, Italy and Portugal.
Canadian bills - Canadian bonds once again appear to have the wind in their sales today with the June futures contract racing towards last week's high. That means that Canadian yields are lower on the week at 3.43% and they have once again cut beneath the yield on U.S. notes by five basis points. The threat to the global recovery is manifesting itself in weaker crude oil prices and feeding into a decline for the local dollar. Dealers are therefore winding in their growth forecasts to the domestic economy. Canadian bill prices reflected this in spades as contracts jumped 20 basis points at maturities starting next March.
Australian bills – Aussie bill prices were also firmer but less supported by declining crude oil prices. Chinese Premier Wen Jiabao observed the shaky foundations to the global recovery and expressed concern that the European debt crisis was spreading. Aussie bonds jumped to see the 10-year yield close a shade beneath 5.5% on the week.
Japanese bonds - Japan government bond prices firmed as the stock markets across the region slid. The June JGB contract rose 26 ticks to close at 139.95 and closed with a yield of 1.285%.
