Friday, April 30, 2010

Bond yields are coming into the home stretch a little firmer as investors get a chance to push yields slightly lower in response to in-line data for U.S. and Canadian GDP. Since Eurozone consumer prices also rose at the predicted rate during the month, bond prices have forged ahead. The European bond markets are heading in to a weekend out of which investors are braced for a positive announcement from the EU, Greece and the IMF and one that will likely find German support. But yields this week have been all over the place as volatility stepped up a notch.

European bond markets - German 10-year yields are closing the week six basis points lower at 3.02% having fallen to 2.925% as manic investors sought to buy the securest of European governments bonds. The June bund contract cracked on Thursday after surging midweek but has found its feet on Friday and is higher by 42 ticks at 124.84. The European short end is also displaying a positive bias to close the week. Greek yields by comparison closed at 8.97% and up 31 basis points on the week having reached a panic-extreme at 11.29%.

Eurodollar futures - The treasury curve eased after a first glimpse at quarter one GDP data, which missed by a smidgeon to come in at 3.2%. Not a big deal but after soothe words from the FOMC this week, the effect of slightly softer data has helped maintain demand for fixed income. The volatility in the markets saw two-year note yields range within a 10-basis point range settling at 0.976% on Friday morning, while investors at the 10-year maturity have walked the tightrope between 3.84% and 3.67% as yields settle close to 3.31% into the weekend. Eurodollar futures are slothful after GDP data and going nowhere.

Canadian bills - Canadian fixed income rose in line with global bonds despite a six monthly increase in GDP. However, the data slowed a little and helps raise the prospect that the Bank of Canada can afford to adopt a less aggressive posture in coming months. Bonds are 37 ticks better at 117.54 in the June contract, helping drive the yield lower to 3.70%. Bill prices rose two basis points this morning after the February GDP data.

Japanese bonds - Japanese bond prices declined as regional stock markets continued to rebound ahead of the end of the week. The Bank of Japan's more upbeat assessment clearly didn't benefit bonds, although despite predictions of vast improvements in GDP over the next two years the economy remains sticky. The June JGB future slipped eight ticks to 139.67 with the 10-year yield closing ahead of the Golden Week holiday at 1.27%.

British gilt - British gilts had a whacky week and it appears that investors seem a little more assured heading into the pre-election weekend that a majority government can be formed. Conservative party leader David Cameron won the final television debate according to snap-polls in the aftermath of the live event. Gilt prices responded well and are closing close to the lowest yield point of the week at 3.88%. Drama during the week has pushed yields down from a peak at 4.06%. Seven points of that decline have come in today's session. Short sterling futures rallied also on the news and possibly responded to a dip to a three-month low in consumer confidence.

Australian bills -Australian bond yields slipped three basis points to stand at 5.70% while bears hedged bets on Tuesday's monetary policy committee meet by selling bill futures down three ticks.

Andrew Wilkinson Senior Market Analyst