A change of heart at the ECB offered the Greek authorities some breathing room when the central bank's President Jean-Claude Trichet announced that it would still accept Greek bonds into 2011. The move coincides with an EU summit at which German politicians are maintaining an especially stiff stance against the fiscal trickery that the government of Greece has allegedly danced behind. The ECB's softer tone provided impetus to investors wanting to hold higher-yielding Greek bonds who will no longer be frozen out of the central banks refinancing operations in the event that the Moody's rating agency follows the path taken by its cohorts.


European short futures - Yields on Greek bonds fell sharply following the concession Mr. Trichet announced today. His position differs from the firm stance taken in January when the central banker said he wouldn't change the rules to allow one nation to bend around the rules. Perhaps this softer language comes in recognition of the efforts put in by the Greek authorities via their austerity measures.

However, the change of heart forced investors to drop their bid for the safety of core European government debt, which sent June German bund prices reeling. The 10-year yield has now backed off an earlier decline to 3.04% and a 39 tick loss to 123.14 pushed yields to 3.12% in early afternoon trading. Euribor short-dated futures rose by one basis point. The premium commanded by bund yields over comparable U.S. debt widened to 77 basis points yesterday - the widest since January 2007. This spread will narrow and become a key indicator of relief in the event that there is some relief offered as an outcome of this evening's EU summit.


Eurodollar futures - There were further losses for U.S. treasury prices today following a surge in 10-year yields on Wednesday. The recent positive tone to fixed income has been lost on a variety of fronts. Equity markets are once again at 18-month highs giving a huge thumbs-up to earnings across corporate America. The Fed keeps promising to maintain an accommodative monetary stance, further enticing fixed-income buyers to consider riskier alternatives while corroborating economic data leaves the bearish argument on the rocks. And while low domestic monetary policy is possibly assured for a further six months, not only is it looking a decidedly wobbly proposition thereafter, but also we need look no further than Canada to understand that inflation and growth surprises are set to initiate the primary move from a G7 nation.

While the accommodative policy described further by Mr. Bernanke in today's testimony helped steady Eurodollar prices from further declines today, 10-year yields rose to 3.83% from 3.59% just yesterday. Today's yield spike is the highest since January. Elsewhere initial jobless claims data showed a further improvement in the employment outlook with claims falling to 442,000 last weekend.

Australian rate futures - Government bond prices dell for a second day sending the 10-year yield to 5.74%. The move was partially in response to the adjustment in U.S. bonds overnight but also after Assistant Governor Lowe of the RBA described Australian interest rates as still below average.


Canada's 90-day BA's - Expectations for rising official interest rates in Canada were boosted midweek after a speech by Governor Carney, who attracted investors' attention to the conditional low-inflation clause that has kept rates pinned near zero. Nevertheless recent data improvements have largely priced in such a response. The December future failed to make a lower low on the news and currently stands at 98.39 to imply a yield of 1.61%. That's a 40 basis point increase in the implied yield since the end of February. The money market currently predicts that 2% will represent the ceiling within one-year of now, with an ultimate cyclical peak at 3.25% a year later. Canadian government bond yields continued their ascent rising to 3.53% today.

British interest rate futures - Gilt prices are sharply lower in the aftermath of Wednesday's budget statement in which the Chancellor predicted a narrowing of the budget deficit, but failed to really pinpoint how it would happen. The improvement in the fiscal position is largely expected to come as a result of improved tax receipts in an improving economy where the rate of unemployment didn't fulfill the most pessimistic expectations. June gilt futures are 42 ticks lower and are trading at 114.53 with a yield of 4.01%. Sterling futures were marginally higher on the session.

Japan - JGB prices fell sharply following the slide in the yen, which boosted prospects for exporting companies. The relief also dulled appetite for low-yielding government debt in a worsening environment for fixed income. The June 10-year future slipped 41 ticks to 138.50 sending yields to 1.35%.

Andrew Wilkinson

Senior Market Analyst