Wednesday, March 31, 2010

It's all too easy to find bond bears everywhere you look these days, and it's hardly surprising. The global stock markets are up for the first quarter by around 6% if the MSCI Global index is anything to judge that by. Only Spanish and Hong Kong's major indices have failed to turn positive on the year-to-date. But consumer confidence and retail habits have turned up around the world and there are signs of thawing labor markets. So surely the Fed will in turn follow the lead of its Australian counterparts. Even without acting, the accumulation of further evidence should spark a bond market rout. And so today's disappointing ADP employers' report gives bond bears reason to grizzle and growl as they cover their short trades.

Eurodollar futures - Eurodollar futures warmed to an ADP private payroll report, which showed more of the same in terms of ongoing job losses. The report's 23,000 job losses pours cold water on the theory that the U.S. labor market is recovering at anything other than a mercurial pace. Investors were hoping for employment additions in the region of 40,000. Short-dated futures contracts added up to five ticks as yields softened while the June 10-year note future rose 12 ticks to 116-10 where the yield backed away from near the 2010 high to stand at 3.82%.

European short futures - A rise in Eurozone unemployment to 10% and the highest reading since August 2008 was a small factor in keeping Euro yields lower. However, the reaction was at odds with a sharp and unexpected rise in German employment. In March Germany added 31,000 new positions against an expected decline of 7,000 jobs. Gains for bunds were also confused by an acceleration of Eurozone consumer prices, which rose by 1.5% during March compared to a forecast rise of 1.1%. That data also picked up from a 0.9% pace in February.

A Greek official also hinted heavily that his government was likely to test the waters with an as yet undecided U.S. dollar bond issue in preference to euros. That could prove to be a wise choice as it might appeal to investors wanting shorter maturities and for international buyers does away with the risk of investing in euros. In theory, however, if Greece pre-funds all maturing bonds and/or goes to the IMF before the end of May, it could further resolve fears of default, which might arguably bolster the euro.

Still, German bund futures expiring in June continued to rise pushing yields down to 3.07% and close to their panic lows of last week. Euribor futures crept higher by four basis points at deferred contracts.

British interest rate futures - June gilts added 44 ticks to stand at 114.76 with a yield of 3.91% for a decline of seven basis points on the day. A rally in the pound as we close out the quarter saw plenty of short-covering, which helps reduce the negative tone surrounding the slowly recovering British economy. Short sterling futures also gained by around four basis points.

Australian rate futures - Bill futures jumped in response to a sinking feeling amongst consumers. A sharp decline in retail sales data for February came completely out of the blue and flew in the face of a call for a 0.3% gain. In the event sales slumped 1.1% and along with weakness in the housing permits series gave investors enough reason to doubt that the RBA is very likely to hike rates once more when it meets next week. Government bond prices rose just a little and sent the 10-year yield lower by two basis points to 5.77%. Money traders got on their starters blocks for next week's RBA announcement sending bill futures higher by up to eight basis points.

Canada's 90-day BA's - January GDP data rose by 0.6% in Canada helping output get back on track for a June 2008 peak. With a lack of follow-through evidence that the manufacturing recovery is creating too many jobs in a separate release today, investors bought bill futures sending yields plunging by seven basis points at the December 2011 expiration. June bond futures rallied 19 ticks to 117.56 to yield 3.56%.

Japan - Japanese yields remained pinned to the ceiling at fiscal year end. Pension funds bought ultra-long maturities, but it appears that investors remain apprehensive about Thursday's widely anticipated Tankan survey, which is due to provide some economic relief. The June JGB future lost 13 ticks at 138.11 and the yield remained close to its November high-water mark at 1.38%. During the first quarter the yield on the 10-year bond has risen by 11 basis points as the global economy recovers and after a second round of stimulus from the Bank of Japan.

Andrew Wilkinson

Senior Market Analyst