Wednesday, April 28, 2010

The fear-fuelled rally in (safe) global bond markets came crashing back down to earth in volatile trading midweek after rumors swirled that the IMF might stump up more cash for Athens as part of an expanded rescue package. Meanwhile Messers Strauss Kahn of the IMF and Trichet of the ECB addressed politicians in Berlin as they tried to persuade the Germans that a bailout was necessary and that it needed cash sooner rather than later.

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European bond markets - No fun for traders following the double S&P downgrade for both Greek and Portugal sovereign debt. Yields on the Greek two-year surged to around 25% according to Bloomberg news, while borrowing costs in Ireland, Spain, Italy and Portugal all felt the downdraft for Greek bond prices. The premium investors demand for holding Greek over German debt at the 10-year maturity exceeded 800 basis points earlier today. The market meltdown on Tuesday forced regulators in Athens to ban short stock sales.

Despite the heating temperature in global bond activity, the June German bund contract has seen fear-based gains all but evaporate in today's action. Having reached a fresh contract peak at 125.51 its price has come back to below unchanged as investors fear yields have overshot falling as far as 2.91% earlier. The yield is back to 3.02% with the contract last trading at 124.64. The huge intraday range has a daily low point at 124.30.

Eurodollar futures - June treasury notes have also erased an earlier jolt higher and currently show losses of 12 ticks at 117-09 where the current 10-year yield is 3.73%. As the day wears on investors will likely by increasingly restless in awaiting the FOMC policy statement at 2:15ET. The Fed is unlikely to change either policy settings or stray from its tone that the economy continues to need accommodative policy. Far-dated Eurodollars are a shade easier this morning.

Canadian bills - Canadian government bonds continue to witness extreme price movements as the risk-ship lurches from side-to-side. As the stormy waters calm and the Canadian dollar recovers its sea legs, government bond prices are paring those recent gains. The June contract is lower by 16 ticks to 117.38 where the yield is 3.62%.

In testimony in the House of Commons yesterday Bank of Canada Governor Carney said that the currency remained the number one threat to the nation's growth recovery. He stated that rate rises were on the cards but certainly not pre-ordained over and above the clearly needed movement away from ultra-low rates. Recently he and others have stated that the time has passed for the need for highly accommodative policy. Bill prices at the short end were modestly lower but are already braced for a near 1% movement in short-term rates before the end of summer.

Japanese bonds - Japanese government bond futures surged overnight to play catch-up with falling stocks and sliding global yields. The June future rose 35 ticks to 139.75 while the 10-year yield fell to 1.272%.

British gilt - June gilts prices remained well bid in line with other safe haven bonds, despite the fact that Britain has the largest budget deficit of 11% of GDP among G7 nations. The June contract rose by 33 ticks to 115.14 while the mixed direction of short sterling futures served to flatten the yield curve.

Australian bills -June bills slumped 10 basis points following a near doubling in consumer prices between the fourth quarter of 2009 and the first of 2010. The annual 2.9% pace of increase in prices paid by consumers was above expectations and towards the hotter end of the reading acceptable to the Reserve Bank. It meets next week to determine whether to adjust policy up from its current 4.25%. The yield on the 10-year maturity nevertheless eased by seven basis points to 5.70%.

Andrew Wilkinson

Senior Market Analyst