Global bond prices are clawing their way back from daily lows facing the headwinds of rising commodity and equity prices and a weakening dollar. Both are symptomatic of a global recovery that raises doubts with investors that the current health of the world economy might not justify record low yields.

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European bond markets - A surprise increase in German consumer confidence for the month of August as reported by GfK research helped bolster the view that the largest European economy will continue to grow over the summer just as investors are questioning the health of the world's largest consumer nation - the U.S. In ongoing signs of calmer markets, peripheral government bond prices firmed in the face of price weakness of core Germany's bunds. The September bund future has rebounded from an intraday low at 127.37 paring losses to 36 ticks on the day to stand at 127.61 carrying a yield of 2.77%. Spanish government bond yields slumped by 13 basis points while those of Greece and Portugal fell by 12 and 31 basis points respectively.

Eurodollar futures - Ahead of data expected to show a decline in U.S. consumer confidence as well as the current state of manufacturing from the Richmond Fed, an index of home prices reported a higher than forecast increase in house prices across 20 metropolitan areas. The Case-Shiller home price index gained 4.6% in the year through May helping punish bond prices. Pre-market stock index futures have been higher all morning and threaten to create the first full day of trading above the widely-watched 200-day moving average for the index in more than one month.

The attitude towards treasury bonds was also knocked after comments by Philadelphia Fed chief Plosser to Bloomberg news. He noted that it was premature to discuss the possibility of further monetary stimulus based purely on the recent string of data indicative of a slowing economy. September treasury futures slipped to 122-06 sending yields higher to 3.04% for a five pip rise on the session. Meanwhile Eurodollar futures prices are lower in price terms implying mildly higher yields ahead.

British gilts - September gilt futures shed 72 ticks to an intraday low of 119.52 following the release of evidence indicating the consumer is in fine form. The CBI retail sales survey showed the highest reading in three years while prospects for future sales were the strongest in six. Short sterling futures are lower but like Eurodollars are only facing marginal losses almost safe in the knowledge that neither the Fed's nor the Bank of England's official policies are heading anywhere soon. The 10-year government bond yield also rose by five basis points to 3.50%.

Japanese bonds - Japan is another area insulated from changing monetary policy anytime soon on account of a delicate recovery thwarted at every turn by a strengthening exchange rate. Bank of Japan data overnight revealed for a 21st straight month, a decline in the corporate services price index, which dipped by a deeper than expected 1%. The challenge of deflation, which enhances the appeal of fixed income, has long held back the progress of policymakers. With little prospect of a rate increase on the cards demand for two-year notes at auction today rose to the highest in five years and helped further flatten the yield curve. The September JGB future rose by nine ticks to 141.83 further reducing the 10-year yield to 1.04%.

Canadian bills -Canadian government bond yields rose but only by two pips as investors favored the outright higher yield at 3.25% over that of the U.S. treasury note, yielding 3.04%. Selling pressure at the short end was also muted on bills of acceptance (BAX) futures, where implied yields added just two basis points.

Australian bills - A rise in the value of the Aussie dollar based upon growing recovery hopes served to knock a dent in interest rate expectations ahead of the quarterly report overnight on inflation in the nation. Investors are braced for the highest reading since the quarter ending in September 2009 and question whether a sufficiently high reading would allow the Reserve Bank to plow ahead with further monetary tightening. 90-day bill prices were lower by up to nine pips while the 10-year yield added three basis points to stand at 5.255%.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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