Better times are once again catching up with bond holders as investors find less reason to buy encouraged by an improving economic climate. The euro currency earlier took a boost on account of a surge in a gauge of business confidence that leaves German executives the most optimistic since the east and west become one again in 1991. The same reason is driving shorter term yields higher as investors grow concerned that a hotter economy will set off a burst of inflation that would require upwards adjustments to monetary policy.

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Eurodollar futures - Note prices fell sharply yesterday ahead of increasing supply and in response to a turnaround in weekly initial claims data. On Friday the Fed goes out hunting for bonds trading in the open market as part of its $600 billion-eight-month-buying spree. March note futures were earlier encouraged by this prospect reaching an intraday high at 120-05 before turning south on the day to trade at 119-24 to yield 3.47%. Eurodollar futures have given up a couple of ticks.

Canadian bills - A healthy retail sales report for December lead by accelerating sales of auto parts and new vehicles further depressed the March government bond future contract, which slumped by 38 ticks to 120.35. Shorter-dated bills of acceptance declined by five basis points as yields rose.

 

European bond markets - European bond markets are volatile in the sense that a healthy core German economy is causing fixed income buyers some concerns. The German bund market faces a significant loss this week where yields have risen at the 10-year horizon to 3.19%. Losses are greater at the two-year maturity where surging yields rose to a one-year high following a leap in a January reading of business confidence from the IFO. The survey refueled earlier concerns that inflation might inevitably force the ECB to take remedial action in terms of tightening monetary policy. Such concerns forced a widening between U.S. and German two-year paper to a two year peak. Elsewhere, peripheral bonds overlooked a warning from Fitch ratings who suggested that despite a low likelihood of a break-up of the Eurozone, there was a greater likelihood of further credit rating downgrades. It said that weakness in second half growth might stymie Greek ambitions to reduce its deficit while claiming that Spain may underestimate the cost of recapitalizing its banking system. Nevertheless, a growing sense that EU officials are firming up a lasting sovereign debt solution buoyed peripheral debt prices forcing a narrowing of premiums over German bunds.

Japanese bonds - Japanese markets were quiet overnight with March futures trading within a 46 tick range and closing with a small three pip gain at 139.76. The 10-year yield rose marginally to close at 1.20%. 

British gilts - Gilt prices are torn between an awfully weak reading for retail sales in December, when consumers were forced to remain housebound on account of sad weather, and a growing sense that inflation will remain a dominant second half theme. The March future made a stab at moving to higher ground, but quickly ran into selling pressure emanating from North American markets were prices ground lower. The March gilt trades down six ticks at 116.90 to yield 3.71%. The 0.8% slide in retail sales data prompted a reduction in fear at the shorter end with sterling futures making gains of two basis points. 

Australian bills - Aussie bills fell modestly following a recovery in the Aussie dollar with implied yields rising three basis points. Government bond prices fell sharply as dealers caught up with a jump in global yields late on Thursday. The 10-year yield added eight basis points to 5.56%.

Andrew Wilkinson                                                                    

Senior Market Analyst