Tuesday, May 11, 2010

Some of the earlier morning fears appear to have dissipated leaving bond prices off their best levels. To start the session investors were snared by a fresh decline in the euro as investors' worries grew that the European government package might contain the problem for now but would ultimately slow growth in the region and even worldwide. The fall in the euro weighed on stock markets and caused investors to resume their purchases of core government market bonds. However, the threat of national central bank buying in those peripheral government bond markets appears to be enough for now to stem rising yields in those issues.

European bond markets - A fresh warning from Moody's rating agency yesterday that they might trash the Greek credit rating regardless of the joint European initiative leaves a cloud of Europe. The agency cited dismal economic prospects for a nation whose fate is now likely indifferent to the sizeable amount of support offered by the Europeans. Having spent Monday writing sell tickets, German bund investors were rushing to the other side of the boat today forcing June bund prices to a 126.29 high. However, traders pared those gains to a 24 tick rally and by mid-afternoon the contract stands at 125.73. Spreads at the 10-year area of the curve initially widened as German yields pushed lower but later peripheral bond prices climbed harder and maintained gains.

British gilt - You have to follow the pound to gauge the temperature of British politics. The Liberal Democrats couldn't be in a better position to force ballot reformation by promising to tip the balance of power to whichever of the main political parties will take the issue to a national referendum. The pound has rallied off its lows as inestors get to grips with a likely workable government majority at some stage sooner rather than later. Gilt yields fell two basis points to 3.89% as June gilt futures rose in price by 27 ticks to 116.45. Short sterling futures unwound six basis points of yesterday's oversized rally.

Eurodollar futures -Eurodollar futures yield three basis points more this morning. Investors favor U.S. government fixed income over Eurozone denominated debt regardless of the ongoing and gargantuan debt issuance schedule the treasury pushes from week-to-week. June treasury note futures are about unchanged at 118-30 where the yield is 3.53% after fears gripped the markets earlier. The intraday high for the June contract is 119-18.

Canadian bills -Canadian yields continue to march ever higher despite the extreme moves in sentiment. As the June policy meeting approaches investors remain mindful that the Bank of Canada can easily point to the rude economic health of its domestic economy as a reason to abandon ultra-low monetary policy. Bills have shed a further seven basis points today while the 10-year government bond yield is a little lower in line with gains for U.S. treasury notes.

Australian bills -Australian yields eased after a slew of positive economic reports from China. However, so positive is the data that investors are rather fearful that the Peoples Bank of China will have no choice other than to tighten monetary policy or allow an appreciation of its currency. And so with the gloss taken off the data the Australian credit markets priced in a rapid response and a de facto cooling of the economy. 90-day bill yields tumbled five pips while government bond yields slumped eight basis points to 5.47%.

Japanese bonds - Upwards pressure remained on Japanese bond prices with the 1-0year yield closing higher at 1.30% despite a resumption of pressure on the regions stock markets. The Nikkei average closed 1.4% lower as pressure resurfaced on the euro.

Andrew Wilkinson Senior Market Analyst