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Government bond prices are lower once again as risk aversion ebbs and the flow of risk appetite resumes. Global stock prices are higher as investors are pricing in a lower chance of contagion as Irish leaders appear to be softening their resistance to a joint EU, ECB and IMF rescue package that according to Irish central bank Governor Honohan would involve a loan of "tens of billions" of euros.
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Eurodollar futures - Bond investors are coming unstuck in their optimism over the path of yields following the build-up to the Fed's latest bond-buying spree. The Fed is buying about $75 billion per month or $3.75 billion in bonds each trading session but the impact so far on depressing yields has been quite the opposite. The benchmark 10-year yield has moved up almost one half of one percent towards 3% since the FOMC statement, while the intended consequence of wading into the market is to create a better borrowing environment through lowering yields. Rising yields are a symptom of a slowly improving economy with the latest sign coming on Thursday in the form of a stable reading of initial claims at 439,000. Continuing claims weakened to a two-year low at 4.295 million. Later today investors predict an improved reading for both the November Philly Fed survey and the October leading indicator. December treasury note futures eased by 12 ticks to 124-16 indicating a yield of 2.92% while deferred contract Eurodollar futures also gave up to eight basis points in yield.
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European bond markets - Irish and Greek debt prices rose in hopes of a deal to be struck over the weekend in Dublin. If Ireland agrees to assistance it will remove funding stresses from the market and hopefully improve appetite for peripheral sovereign debt. Elsewhere German and French bonds also slumped with the December bund contract hitting 120.57 for its lowest price in more than three months boosting the yield on the 10-year government bond to 2.67%.
British gilts - Gilt prices slid to as low as 120.72 in the December contract caught up in the reversal of risk aversion. A return to growth in consumer spending habits also impacted the price of bonds on Thursday after October retail sales grew by 0.5% on the month following two earlier declines. The 10-year gilt yield rose a sizeable eight basis points to 3.35% while short sterling prices proved that investors are being wrong-footed by the need for refuge found in government bonds.
Japanese bonds -Asian stocks surged on Thursday lifting the Nikkei 225 back above 10,000 for the first time in five months on rising investor optimism. Once again the perceived need for the safety of fixed income dwindled sending the yield on the 10-year JGB jumping by six basis points to 1.11% for a two-month high.
Australian bills -Recent fears over a further move by Beijing to slow the pace of domestic growth were left to fall by the wayside allowing risk-happy investors to dump Aussie government bonds and short-dated bills. Deputy Governor at the RBA Ric Battellino spoke about the need to properly manage the resource boom facing Australia or else the benefits would be unsustainable. Implied yields on 90-day bills rose by seven basis points. The 10-year government bond yield rose sharply to 5.51%.
Canadian bills - Canadian bond prices slid along with U.S. treasuries sending the yield four basis points higher to 3.13% following the release of two stronger data readings. September's wholesale sales had been predicted to contract but in the event rose 0.4% on the month with August data also revised firmer. Meanwhile the leading index of economic activity also outpaced the forecast and rose 0.2% for the month indicative of more confidence in the future pace of economic growth.
Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com
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