Monday, May 3, 2010
A void looms for the midweek period for many investors who await the key non-farm payroll data on Friday. In the meantime fixed income prices are slightly lower after the weekend agreement by the EU and IMF to provide €110 billion in financial aid to Greece in exchange for no small dose of austerity. The need for the safe haven of bonds is lifting slowly, which is playing out in weaker German bund prices as Greek bonds continue their rebound. For U.S. markets, the prospect of the largest employment gain in three years is starting to put some distance between the need for a normalization of the yield curve and need for a safe harbor from stormy seas - the legacy of financial ruin.
European bond markets - German two and 10-year yields rose by five basis points after the yet-to-be ratified €110 billion rescue package for Greece. Clearly the hardship the Greek populace now faces in exchange for the aid of its European cohorts is not going down well. Demonstrations have turned into riots in Athens and more national strikes are planned. The economy of Greece as a result of the austere measures to curb spending will grow slower than first thought and not leave the deficit to GDP ratio beneath the EU target of 3% until 2014.
Yet the markets perceive that the pain is likely to be part of a workable solution and one that it senses the political faction, especially in Germany, will vote for.
The ECB headed off ratings agencies' downgrades of Greek debt by pledging to accept the nation's riskier debt as acceptable collateral. One has to accept that so doing was part of the plan regardless of the opinion of the ratings agents. Euribor futures are weaker by five basis points today as relief manifests itself though slightly tighter cash prices. June bund prices shed 50 ticks to 124.35 where yields rose to 3.06%.
Eurodollar futures - The late-in-the-day selling on Friday was far less connected to what might come out of Europe over the weekend and more to do with fears over the fallout from the government's battle with Goldman Sachs and the implications for financial reform. The subsequent fear-bid for safety in U.S. bonds was feeling the benefit from Greek and U.S. market fears and so with stock markets opening in positive territory on both fronts, the focus for bond traders is now the Friday release of what is forecast to be a 188,000 gain in U.S. employment.
Further welcome signs of amelioration in the labor market should continue to weigh on bond prices sending yields higher. Both two and 10-year note yields gained two basis points today with the spread between the two at 271 basis points. U.S. 10-year yields rose to 3.69%.
Canadian bills - Canadian bond prices rose earlier in the session before turning into the red. The June contract reached a peak of 117.87 before falling to 117.73 for a three-tick loss. Bills are also on the wane and are down two basis points.
Australian bills -Investors spent the session fretting about the prospects for a further 25 basis point interest rate increase from the RBA tomorrow. There wasn't much comfortable news for the market, which is currently 60% biased towards another rate rise that would lift the central bank's benchmark rate to 4.5%. Chinese authorities signaled a further increase in the reserve requirement attempting to rein in excessive bank lending. Investors took this as a further sign that strong regional growth requires further domestic measures to quell the Australian expansion. A Melbourne Institute survey didn't provide any respite for inflation hawks. The survey showed a jump in inflation expectations between March and April readings, further stressing fixed income. As a result the yield curve jumped by eight basis points from two years to 10-year yields. The latter carried a yield of 5.77% ahead of the Tuesday meeting.
Japanese bonds - Japanese markets are closed.
British gilt - Markets closed for May Day holiday.
Andrew Wilkinson Senior Market Analyst