The post-non-farm payroll rally in government debt remains intact despite amelioration in any residual double-dip fears for the economy. Bond prices took an immediate leg up after a net 131,000 loss of jobs for the world's largest economy and the subsequent retracement has been remarkably constrained, with the result that a drop in yields at this point looks like it might remain in force. Investors bought more bonds as prices attempted to test the break to higher ground and markets seem now to be on hold as investors await the outcome of the one-day meeting at the Fed on Tuesday.

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Eurodollar futures - Treasury prices continued to forge ahead after Friday's jobs report sending the yield on the two-year note to a record low just beneath 0.5% while that on the 10-year slipped to 2.80%. That's the lowest point in 15 months as traders mulled the overall health of the economy. Fears of a fresh bond buying program at the Fed have lately been fanned by a research paper from St. Louis Fed chief James Bullard. His warning that the Fed should resume paper buying if deflation looms has investors worried that monetary policy will remain on hold indefinitely. Investors continue to plow along the yield curve in fear that the Fed will remain hemmed in to its current policy even if the recovery remains moderate, a term recently used by Chairman Bernanke. Eurodollar futures at far-dated expirations continued to rise on the jobs news on Friday reaching never-before-seen contract peaks. The December 2011 expiration dipped to an implied yield of 0.9% as traders continued to reduce the likelihood of a reversal in data suggesting the Fed might change direction. Traders in the Chicago note pits may as well take an extended weekend today with little action to be had in the September treasury note, which is unchanged at 124-18 to yield 2.83%.

Canadian bills - Volume is also extremely light in the Canadian money-market complex. Bill prices are just about unchanged on low turnover. Friday's employment report saw the Canadian unemployment rate edge higher to 8%, which undermines any further Bank of Canada ambitions to lift monetary policy further. However, the yield spread between U.S. and domestic government bond yields has widened during last week to 24 basis points having closed to around 15 points recently.

Japanese bonds - The fear of an impending global and domestic slowdown attracted buyers of Japanese fixed income to begin the week. Yields slumped by four basis points to stand at exactly 1% as falling stock market prices weighed on sentiment.

European bond markets - German bunds took their cue on Friday from the jolt to U.S. yields enabling a decline to 2.52% today. The European economy continues with German export orders for June showing unexpected strength. However, with the world's leading economy in a lull, investors continue to push yields lower as the race to lock into low yields continues. Euribor prices rose by a couple of basis points.

British gilts -Short sterling prices are also suffering from the summertime blues with little to influence prices in either direction. Prices attempted an assault on the contract high after Friday's U.S. jobs report but failed to breakthrough resistance. The December 2011 expiration currently implies a three-month cash rate of 1.45% compared to the central bank's current official short-term rate of 0.5% at. Investors appear to have taken some profits on September gilts after recent gains with the contract currently down by 19 ticks to 122.42 where the yield is 3.23%.

Australian bills - Bill prices were marginally lower in Sydney while prices of government bonds rallied as investors once again locked into higher yields following the lead of U.S. fixed income. The 10-year yield dropped by four basis points to 5.095%.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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