Monday, March 29, 2010

Something of a conflict to start the week as European government bonds rally sending yields lower while U.S. yields continue their steady ascent. Last week's canary in a coalmine comments from former Fed Governor Alan Greenspan indicate that he sees recent bond price declines as marking the advent of an ultimate Fed tightening. And while European government bond traders immediately sang from the same song sheet at the time, this week the situation seems to favor Eurozone bond prices, where investors clearly feel that a slower and less engaged recovery is likely to hinder central bankers from raising official rates anytime soon.


Eurodollar futures -Two year yields remain stubbornly above 1% at 1.02% on Monday while June 10-year note futures are rebounding from earlier in the day losses to as low as 115-22. Yields at the 10-year are flat at 3.85% following in-line data for consumer spending through February. The short-end of the curve is also positive by one or two ticks.

European short futures - News that the Greek authorities have engaged two investment banks to find buyers for a new seven year issue gave off an air of confidence earlier and one that sent European fixed income prices lower. Yet even in the face of unexpected improvements in Eurozone confidence data bond prices have risen to fresh intraday highs indicating that markets are not yet comfortable with abandoning the notion that sovereign defaults may have passed by so soon. Euribor futures are grinding slightly higher in line with marginal improvements in slipping cash yields at the short end of the curve. Jun bund prices are smack on the daily high in late European trading at 123.13.

Australian rate futures - Futures expiring in September 2011 slumped 12 basis points earlier in response to Governor Glenn Stevens attempts to warn speculators from expecting a continuation of housing price appreciation. He warned against expecting that gains would be allowed to make for a get-rich-quick scenario for speculators. The entire yield curve shifted north in anticipation of faster and further interest rate increases from the Reserve Bank as Mr. Stevens warned that rates remain below average and that the central bank would not be doing consumers any favors by maintaining abnormally low yields and suddenly hammering them with s shift in rates. Investors reacted by lifting the expected cost of borrowing. 10-year government yields jumped six basis points to 5.78%.

Canada's 90-day BA's - While Eurodollar prices are positive so far on Monday the same can't be said for similar Canadian maturities, which are flat to slightly lower. The market already has the bit between its teeth in looking for a possible interest rate rise as soon as April when the central bank next updates its growth and inflation expectations. Prices of the June government 10-year bond fell 14 ticks to 117.45 during early morning trading and sent the yield higher to 3.56%.

British interest rate futures - June gilt prices surged 58 ticks higher during the afternoon session sending the yield lower by seven basis points to 3.96%. Short sterling made marginal gains after S&P affirmed its AAA credit rating on sovereign debt but noted that a lack of clarity on how the budget gap would narrow was sufficient for it to maintain a negative outlook.

Japan - JGB prices fell sending yields to the highest since November. The June future slipped 15 basis points to 138.18 and a yield of 1.39%. The mood was soured by a 4.2% annual increase in the pace of retail sales adding to the recovery story. Meanwhile dealers anticipate that the Bank of Japan's Tankan Survey due for release on Thursday will show the best reading since September 2008.

Andrew Wilkinson

Senior Market Analyst