The crescendo in fears over the survival of the single European currency has caused investors over time to raise the white flag of surrender over risk appeal. As long as there remains a problem for a Eurozone fast-becoming further constrained by spending cuts and shrinking tax revenues, the lower interest rates will remain low. In turn that thought process has provoked more and more buyers to turn to the safety of fixed income securities issued by the bigger global governments. Yet risk aversion isn't what it used to be. Stock markets are at 18-month highs and commodity prices confirm the return of real and rising demand, even though they are pressured by a rising dollar. Despite the declining euro's ability to act as a barometer for sovereign crisis, today bond prices are stumbling over signs of ongoing real gains across global economies.


Eurodollar futures - Treasury prices slipped ahead of a five-year auction totaling $42 billion later today and after a third-straight monthly increase in durable goods orders. The March reading of orders of goods meant to last more than two years rose 0.5% in line with expectations, while ex-transportation items, the measure rose 0.9%. The February data was also lifted significantly and together the data shows that corporate spending on new equipment and inventories has stepped up yet another notch. It's more good news for the manufacturing sector, which is now assured of maintaining its expansionary path for several quarters to come. The broader ray of light from today's data is that growing business activity will lead to a pick-up in hiring intentions.

In light of the data Eurodollar futures reversed yesterday's gains sending implied yields higher by around four ticks along the yield spectrum. Meanwhile there were sharp losses across the treasury curve where the two-year yield breached the 1% barrier and the 10-year yield jumped by nine basis points to 3.77%. June treasury note futures slipped to 116-19.

European short futures - Technically speaking, German bund prices should motor under the conditions of rising Eurozone tension. It's true to state that political statements have elevated such tension between members. The German electorate is angry that it should have to pay for the errant ways of the government of Greece and as the Eurozone's largest member Germany would be left footing a significant part of the bill. Hence Angela Merkel is calling on the IMF to be part of any financial aid package to Athens.

And while the euro currency is in a tailspin as the uncertainty grows, European yields responded somewhat differently this afternoon following an earlier report indicating growing optimism in the German economy via the IFO report. Eurozone data also indicated a healthy ongoing pace of expansion in both manufacturing and service data. The confirmation that the economy is as robust as it is running parallel to a weaker currency that may serve to agitate overseas demand for Eurozone exports is possibly making government bond traders realize that they are now pushing on the shoestring in search of solace from fixed income as economies recover regardless. June bund futures registered a high at 123.77 before slumping to 123.25 where yields rose to 3.08%.

Australian rate futures - Government bond prices slipped to send the 10-year yield higher by three basis points at 5.68%. The decline came despite a collision with risk aversion evidenced by a drop in the value of the Aussie dollar relative to the U.S. dollar. However, a rising vacancy rate for skilled workers according to a government report proved that the employment market is set to face ongoing expansion as the Asian market recovers. 90-day Aussie bill futures slipped by as much as nine basis points.


Canada's 90-day BA's - Canadian yields rose ahead of a three-year auction of C$3.2 billion in government debt at which Canada will likely agree to pay the highest yield in at least four months. Recent evidence of strengthening domestic activity thanks to rising employment and a pick-up in retail spending is making investors toss around the notion that interest rates are heading higher before too long in Canada. A speech by Mark Carney, the Governor at the Bank of Canada around lunchtime will be followed by a press conference this afternoon. Bill prices slipped after the U.S. durable goods report showed a strengthening in orders and the need to boost inventories. Two-year Canadian yields added five basis points to 1.67% while the 10-year June government bond future dropped by 43 ticks to 117.96 to yield 3.52% for a six basis point rise on the day.

British interest rate futures - Ahead of this afternoon's budget statement Chancellor Darling maintained the government's 1-1.5% GDP forecast for 2010 but brought expectations for 2011 growth down a notch in line with the Bank of England's forecast at 3-3.5%. Gilt prices are down sharply, but not necessarily on account of this news. June gilts are one of the biggest decliners today as prices slumped by 52 ticks to 114.97. Short sterling prices are one tick lower and there will be no change in interest rates accompanying today's budget.

Japan - Expectations that reform in the postal-bank deposits would allow individuals to channel more money into government issued debt helped push bond yields down to their lowest in a week. The 10-year JGB future rose by 14 ticks to 138.96 pushing the yield to 1.326%.

But once again there was otherwise healthy data out of Tokyo overnight, aiding equity prices to a 0.4% rally hot on the heels of gains in American markets the day earlier. Export data rose by the most in 30 years as demand rebounded from a depressed February 2009 reading. Export volumes rose by 45.3% year-over-year causing the trade surplus to rise by its most since 1982. Export data showed an expansion to all regions for the first time since August 2007.

Andrew Wilkinson