Residual Eurozone fears and U.S. bargain-hunting lift bonds

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By Andrew Wilkinson | July 6, 2011 1:34 AM EST

After a sour-end to last week government securities have come in firmer after a vacation-extended long weekend. Equity indices are failing to build on a strong rally last week, which was based on relief over a Greek vote to implement deep austerity measures. Fixed income is higher on Tuesday as yields pull back from a sharp rise.


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European bond markets - Lingering fears remain among investors with few able to put their fingers on quite what the post-Greek vote problem is. Italian and Spanish government debt prices fell on Tuesday forcing a mild widening of spreads against core German government bunds. There remains a sense of unfinished business as European officials look to the ratings agencies to find out whether any plans in the making involving soon-to-mature-Greek bonds will find a seal of approval that would view selective default as merely temporary and insufficient to term as out-and-out default. But a slowing regional economy is also throwing up new challenges. May retail sales across the zone slid by the most in over one year while a slowing services sector was evidenced by PMI data. Yet on Thursday the ECB has all but promised to counter inflation with its second monetary tightening. September bund futures are mildly higher but off a post-data peak. The 10-year bund yields an unchanged 3.01%.

Eurodollar futures - Three-month contracts were already on the rebound ahead of a report that showed factory orders failed to rebound during May as much as was predicted. The report showed a gain of 0.8% in orders on the prior month falling short of an anticipated 1% gain. The September treasury mote future was also already ahead on the session as investors reflected on a five-day slide that lifted yields by more than 30 basis points. Yields at the 10-year maturity eased by five basis points to 3.13% on Tuesday as investors look ahead to Friday's employment report that when all said and done is likely to leave the rate of unemployment at a heady 9.1%.

Japanese bonds -An improving domestic economy and a report showing a healthy jump in wage growth last month left investors wondering how the government might successfully auction fresh bonds in such an environment. With a large looming 30-year auction this week investors tried to make room for new supply by selling longer-dated maturities causing a rise in the yield curve. The yield on 10-year paper also added one basis point as the September JGB futures contracts fell by 11 ticks to 140.80 carrying a yield of 1.16% and the highest in two-months.  

Australian bills - Fascination with the Aussie yield curve continued after the Reserve Bank provoked fears that its earlier growth estimates may have been a little on the high side. Investors continue to fret that the next move for Australian monetary policy might be downwards in light of further contraction in the service sector and fears that Chinese authorities might strike to combat inflation as soon as this weekend. A Beijing newspaper forewarned that the central bank might lift interest rates after hours on Friday further dampening domestic demand across Australia's biggest buyer. The implied yield on bill futures dropped by five basis points as dealers bet that the central bank is heading towards dropping rates. The benchmark government bond yield slid by as much to close yielding 5.17%.

Canadian bills - The Canadian curve flattened by a couple of basis points on Tuesday with sellers driving the implied yield on 2011 contracts marginally higher as buyers drove down implied yields across later contracts. Government bond futures fell by 13 ticks adding one pip to the 10-year yield at 3.08%, which remained five basis points cheaper than comparable U.S. treasuries.

British gilts -Sterling futures rose despite optimism among traders over the economy following an upbeat PMI services report. The June reading moved in the opposite direction to expectations indicating a marginal improvement in the services component of the economy. Implied yields eased by around three basis points while the September gilt futures contract surged by 30 ticks depressing the yield by four pips to 3.32%.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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