Thursday, April 29, 2010

Bond prices came back to earth the day after fear gripped the markets sending core-German yields to their lowest point since the panic-stricken days of March last year when global stocks bottomed out. As noted in our earlier Daily FX Brief, there was plenty of positive news to distract from the ongoing Greek saga now threatening to spillover into other nations. Yields have backed up sharply from those panic levels and now that German politicians appear to be considering a far-larger financial package for Greece, investors are contemplating the impact on German supply over the coming three years.

European bond markets - German 10-year bunds today yield 3.06% and stand 14 basis points above a midweek low. The initial €30 billion European partner contribution is likely to end up in excess of €100 billion if current media stories are to be believed. And despite the German public's wholesale opposition and despite the unpopularity amongst politicians over endorsing a plan, the chances are that they must follow the path they started down or risk breaking up the euro. The increase in the likely German burden here is weighing heavily on the June bund contract down 26 ticks to 124.34 this afternoon.

Adding insult to injury to those expecting a continuation of the bond market relief rally, German unemployment shrank at a headline-grabbing 67,000 during April dragging the rate down to 7.8%. Eurozone-wide consumer and business confidence also flew in the face of the flight to low yields and reached a two-year high during the last month. European short ends were virtually unchanged.

Eurodollar futures - The treasury curve flattened as the two-year outflanked an unchanged price gain for the 10-year note. June treasury notes are trading at 117-00 and yield an unchanged 3.76% on the day after an initial claims report showed an inline 11,000 decline in the number of initial claims for unemployment benefits. Eurodollar futures are a tick higher after the Fed's positive review of the economy included an unchanged outlook for monetary policy.

Canadian bills - Canadian government bonds have rebounded from the earlier price decline and the June contract stands 10-ticks higher on the day. Bill prices have a firmer tone given the fact that Governor Carney tried to suggest that the central bank's dropping of its conditional commitment from its recent policy statement was an effective monetary tightening. Given the amount of monetary tightening already priced into the futures strip a gentle rally on relatively friendly comments in his second day of testimony to lawmakers is hardly a surprise.

Japanese bonds - Closed for holiday.

British gilt - British gilts are down futures-wise by 17 ticks to 114.93 where the yield has gained two basis points to 3.95%. The three-horse political race is heating up and increasingly onlookers expect a workable solution to the fiscal deficit in the aftermath of next week's national election. Short sterling futures were higher in price at the front end and weaker at deferred maturities.

Australian bills -Australian bond yields added two basis points at the 10-year to stand at 5.72% as Asian stock markets along with commodity prices firmed. Shorter-dated bill prices slipped ahead of next week's central bank decision.

Andrew Wilkinson Senior Market Analyst