Investors closed their eyes, sold stocks and bought German and U.S. paper in early Monday trading. Rumors ahead of the weekend that Greece was knocking loudly on the default door proved false. However, moves to bolster finances over the weekend with a property tax and a cut in the pay of elected officials seems worse than putting the proverbial Band-Aid on the gunshot wound. The strains across the Eurozone advanced leaving risk barometers set to blow a gasket.

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European bond markets - Lars Feld, economic adviser to German Chancellor Merkel reportedly said that government measures taken prior to July won't stave off a Greek default. Germany is preparing measures to buoy its banks in the event of such drama, which has boosted demand for core German paper at the start of what looks like an ugly week. Maturities from two-to-10 years reached record lows earlier on Monday. December bunds traded recently at 138.36 after earlier driving the 10-year yield down by seven basis points to 1.705%. Euribor contracts have reversed from record low implied yields as liquidity fears grow.

Eurodollar futures - U.S. yields also backed-off record lows on Monday set against the background of sliding stocks and elevated concerns that the economy was teetering on the brink of recession. Unwinding within investors' mindset is the fear that all it might take is a Greek default to undo the recovery, which is poised precipitously and awaiting a much-needed burst of business and consumer confidence. Set against the current backdrop, a recession call has become a coin toss. December treasury note futures shook off an earlier gain to a contract high at 131-04 sending the yield to as low as 1.877%. As a sense of calm prevailed based largely on the fact that indicated selling didn't materialize in the case of equities, the Eurodollar strip turned to reflect a minor loss.

British gilts - British 10-year yields too touched a record low at 2.18% as investors looked to its AAA-rated debt. It's possibly too much to claim that investors are impressed by Britain's austerity drive, but suffice to say gilts have far more appeal than debt of several peripheral nations where tough measures are difficult to implement. If you look at the impact such measures can have on Britain's growth rate, you'll understand why. The December gilt contract still shows a gain on the session having shied away from a record contract high at 130.89. Deferred short sterling maturities are also hitching a ride while nearby contracts are a little lower. Possibly also benefitting gilts today is a report pointing to the need to ring-fence deposits of customer and corporations within Britain's retail banks. The conclusion of the report aimed at reviewing British banks following the near-collapse of the financial system in 2009 could cost £7.5 billion to implement and could further argue against a recovery in banks' loan portfolios adding to the deadweight on Britain's anemic pace of growth.

Australian bills - Bill futures surged by more than 15 basis points across the strip while government bonds were keenly bought as Asian equity prices slumped further. The Australian trade surplus unexpectedly slipped during July possibly hinting at weakening overseas demand and further blunting demand for the local dollar. Implied yields fell heavily as investors built-up expectations for an official monetary antidote from the Reserve Bank. The central bank hoisted its short-rate no less than seven times in a thirteen-month period of tightening starting October 2009 lifting the benchmark rate to 4.75%. Wagers are growing that the RBA will slash yields towards 2.25% within a year. Benchmark bond yields that peaked at 5.84% now stand at 4.11% as perceptions about a cooling global economy trickle down.

Canadian bills - Bill futures reversed an earlier gain across the strip of around five basis points as the rout in equity and commodity prices appeared to be limited in scope. The yield on the benchmark government bonds added three pips pushing the 10-year yield 20 basis points above U.S. treasury debt to 2.23%.

Andrew Wilkinson

Senior Market Analyst       

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