It's a mixed bag for fixed income markets at the half-way point of the week. Data points to firmer economic growth and continues to eat away at the shoestring currently maintaining ultra-low monetary policy. However, words of caution from the latest FOMC meeting and a surprising downgrade to core inflation prospects this year and next is helping boost treasury prices on Wednesday. Meanwhile, over in Europe consternation over just about every facet of the resurfacing Greek budget woes is piling more angst on fixed income markets. Greece is finding it hard to face any particular direction without having dust blown in its face.


Eurodollar futures - Although the FOMC minutes maintained a bias towards easy money, the impact on U.S. bond yields appears limited. The 10-year note rallied off the Monday's floor where yields pierced 4% briefly, but in the June contract prices remain less than a half point higher than that recent low point. June notes are currently trading at 115-13 with Monday's trade creating key support at 114-27. Yields today slipped to 3.93% ahead of a trio of Fed speakers including the Chairman himself, who will discuss economic challenges at 1.30 ET. Deferred Eurodollar futures contracts gained as much as six basis points as yields edged lower.

European bond markets - Greek bond prices slipped further to yields above 7% and widening the premium over German bunds to above 400 basis points. Investors remain on watch for signs of impending sovereign default, which must be testing the sanity of local officials who have gone to great pains to get the Greek fiscal house in order. Those sold on the notion that EU and IMF support would be far-reaching enough to ensure a restoration of stability are now nursing capital losses on bonds they bought. Meanwhile the story mill has it that its Prime Minister is so disappointed with the response from Asian investors that he has cancelled a trip to further market dollar-denominated debt to them. Questions remain over a supposedly planned trip to lure U.S. investors to help plug the yawning deficit. Nervous investors today bid up bunds and euribor prices. German 10-year yields slipped to 3.1% widening the premium the U.S. treasury pays on comparable debt to 94 basis points.

Japanese bonds - A static Bank of Japan meeting saw benchmark interest rates unchanged. The central bank said the export-led recovery remained on track. 10-year JGB yields also remained idle trading at 1.38%.

British gilt - A relatively poorly attended five-year auction weighed on British gilt prices today keeping the yield at the 10-year maturity static at 4%. In the broader European rally one might have expected more from this market in terms of a rally for gilts especially in light of a slight decline in the pace of service sector expansion according to the March reading of the PMI Services survey. A YouGov Plc poll also indicated a widening of the Conservative party's lead over the government to an eight point lead. The last time the same pollster conducted its survey the lead was a mere two points. As we have noted here before a decisive election outcome would be a positive thing for healing the deficit.

Australian bills -Aussie bonds fell a tad to lift the yield by a basis point to stand at 5.84%. The short end of the market didn't reflect deterioration in the outlook for implied rates despite an upward revision for East Asian emerging market growth from the World Bank. 90-day bill prices recouped some of this week's prior losses and rallied around seven basis points. Consumers bought more autos last month than during any earlier month of March on record, indicating inspiration from low interest rates.

Canadian bills -Canadian government bonds are following the path of treasury notes again and have slipped by one basis point to stand at 3.67%. Bill prices at the shorter end of the yield curve matched gains for Eurodollar futures.

Andrew Wilkinson

Senior Market Analyst