European bond prices are lower and are ironically feeling the pressure from rising Greek bond prices forcing a narrowing of the yield premiums between the perceived safety of core Europe and its unstable periphery. Market sentiment is this morning dictated by the perception that the government of Greece might be handed a weekend aid package from the IMF and EU - something that has so far be referred to as the last resort. Speculative pressure this week has damaged Greek banking capitalizations and forced up the cost of borrowing for the country. The burning issue now is whether the last resort means financial assistance comes before or after an attempt by Greece to sell its bonds. However, the possibility remains that the authorities will be forced to market the issue as usual and watch the IMF and EU turn up as buyers of the last resort.

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Eurodollar futures - Earlier gains for treasuries were reversed as hopes grew that the EU and IMF would take some initiative over the weekend to backstop Greece. If this does happen there will be less need for investors to hold fixed income instruments. This negative backdrop saw speculators push Eurodollar prices three ticks lower while the June 10-year futures contract eased by three ticks to stand at 115-23 where the yield rose to 3.91%.

European bond markets - Several commentators on Friday drew the same conclusion that an escalation of the Greek drama radically increases the chances that a financial rescue for Greece will occur at the weekend. While simultaneously shopping for investors around the world hoping to lure willing investors to buy higher yielding Greek bonds, the domestic government is becoming fast-consumed by onerous funding costs. That begs the question of what more the nation must do to qualify for assistance as a last resort.

Greek bond prices firmed while German bunds declined allowing a narrowing in the yield premium faced by Greek issuers. The 10-year Greek bond lost five basis points with comparable German yields rising by almost as much. The June bund fell to a low of 122.86 in mid-afternoon trade accompanying a jump in the euro. Euribor prices also eased by two basis points.

Japanese bonds -Japanese government bond prices stood still as the central bank governor met with the Prime Minister at the first monthly meeting set to be regularly scheduled as of today. The Bank is under political pressure to fight deflation but has a finite number of tools with which to do so having used most at its disposal already. Yields stuck at 1.37% with the June futures contract rising to 138.36.

British gilt - A 16-month peak in the pace of cost increasing facing producers also harmed gilt prices on Friday causing sharp losses for the June contract. Core-output producer prices jumped to a 3.7% annual pace exceeding expectations and causing down-the-road worries over the impact on consumer prices. The June contract slumped to 113.88 before it rallied. Losses for short sterling were naturally greater at the back month contracts where implied yields rose by five basis points. The yield on the 10-year gilt remained unchanged at 4%.

Australian bills -Aussie bonds yields surged by five basis points to stand at 5.80% in light of a sharp relief rally in Asian stock markets. There was fresh fundamental news to drive the local focus, but the relief of rising equity prices was enough to remind investors that the medium-term prospects for Australian growth remain intact and that this will bear on decision-making at the RBA. Bill prices consequently drifted lower by five ticks.

Canadian bills -Canadian government bonds bucked the global trend towards higher yields following a less robust employment report for March. Bond traders bought into the report, which saw a net gain of 17,900 jobs - fewer than forecast - pushing yields a basis point lower to 3.66%. Bill prices also gained by three basis points as the market digested a sharp decline in full-time jobs, more than offset by part-time job gains. The market has been building a case for the central bank to embark on a string of rate hikes in light of a robust recovery underpinned by rallying commodity prices. Today's report rebuffs the notion and adds pressure on the Bank to perform a careful analysis.

Andrew Wilkinson

Senior Market Analyst