There were further pronounced losses for global long-ends on Thursday as equity markets around the world rebounded on signs that China wouldn’t tamper with its investment policy towards Europe despite a 14% slide for the euro so far in 2010. Demand for the safe haven status of government bonds ebbed away as investors questioned whether the sovereign debt crisis might be confined to Europe. Most short end futures are higher as calmer equity markets soothes fears over a liquidity crunch in the money markets where rising Libor rates have given birth to fears that weaker financial institutions might be on the brink of collapse.

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Canadian bills - With a Bank of Canada meeting due next week and a calming in fears surrounding the contagion effect stemming from Europe, investors have gradually put the potential interest rate increase firmly back on to the agenda. An inflation rate rising faster than the central bank had earlier predicted has been boosted by stronger-than-expected economic recovery. But the sovereign debt crisis left a question-mark hanging over the logic of monetary tightening if the world was sitting on the precipice of a second economic decline. June Canadian bond futures slumped 81 ticks on Thursday morning trading sending its yield seven basis points higher to stand at 3.29%. Short-term bill prices also fell under the cosh sending implied yields up to 18 basis points higher. There is a sense that even if the Bank of Canada lets this meeting pass without a tightening, its rhetoric will be pretty harsh in the accompanying statement. That would possibly be the worst possible outcome for the money market between meetings.

Australian bills - Aussie government bond yields rose six basis points to 5.37% after recently frayed nerves were soothed when China denied market rumors that it might withdraw investment in euro-priced assets. The demand for safety offered by bonds immediately slipped as investors bought into riskier assets. The money market curve, which has accordingly priced-out further RBA tightening turned around as investors sold 90-day bills sending implied yields 16 basis points higher. The year-end contract implies a yield of 4.90% compared to a short-term interest rate of 4.50%. As recently as two weeks ago the implied cash rate stood at 5.19% as investors predicted further movements from the central bank before it might finally stop.

Eurodollar futures - The yield on the 10-year note has fallen in less than two months from 4.01% to 3.06% as investors priced in a second wave of recession. After the news that China had no intentions of ditching its euro-area holdings, the world is a calmer place today. Yields continued to back away from historic lows around the world and the U.S. 10-year was no exception and added a further 10 basis points to 3.29% this morning. St. Louis Fed President James Bullard used speech to navigate past the sovereign debt crisis claiming that contagion was not on the agenda on account of the strength of Asian and U.S. recoveries. As liquidity fears ebb away the Eurodollar complex regained its poise after a dramatic string of losses. The curve rose most at the nearby contracts, which saw implied yields fall by eight basis points. First quarter GDP data was revised marginally lower from 3.2% to 3.0% while initial claims data continued to disappoint, although at 460,000 for the latest week remains headlined in the right direction.

European bond markets - Yields continued to rebound in the Eurozone with German debt prices falling to lift 10-year yields to 2.68%. Falling bond prices have propelled yields by 12 basis points in just two days. Pressure was partially lifted off the euro currency today after China rebuffed talk of a move away from the single currency and with growing evidence elsewhere that growth remains firm, there appears less pressure on government bond prices today.

British gilt -No news out of Britain, although the firmer pound was spurred by investors reacting to a warmer appetite for risk today. As such gilt yields backed up with the 10-year rising by three basis points to stand at 3.59%. Short sterling prices were mixed with gains at the front end countered by losses at further dated maturities.

Japanese bonds - Yields jumped the most in three months following a 40% jump in export data, which underscored the healthy Asian economic recovery. Export growth during the first quarter of the year was the primary driving factor behind a 4.9% jump in GDP. The June 10-year JGB future fell 35 ticks to 140.47 where the yield increased to 1.235%. Sentiment was further dented by a report illustrating a rising domestic appetite for assets with higher yields outside of the island nation. Japanese investors were net buyers of notes and stocks overseas during the recent week according to the report.

Andrew Wilkinson Senior Market Analyst