Fixed income prices are drifting lower in knee-jerk response to firming optimism over global demand minus the United States. Stocks and non-safe haven currencies continue to outshine as investors look for better returns than those available in the aftermath of a bond market rally that sent yields to near-record lows as investors worried about economic health. Presently an AOK signal from activity outside of the U.S. doesn't seem sufficient to cause a global rate rethink.

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Japanese bonds - Prime Minister Naoto Kan asked the Bank of Japan to aid with his battle against rising joblessness, which on Friday rose to a seven-month high. Investors bought bonds today driving yields to a seven-year low at the 10-year maturity as investors predict the government will attempt to persuade the Bank of Japan to find alternative means to promoting the virtually free cost of money to borrowers in Japan. The September JGB future rose by seven ticks to 141.91 to yield 1.035%.

Regional activity was actually positive with the MSCI Asia Pacific index of stocks rising 1.1% earlier, while investors were buoyed by the recent healthy state of the Chinese economy. 

Australian bills - While China's manufacturing PMI eased to a still expansionary 51.2 in July, the pace of Australian expansion grew to 54.4 at the same time from 52.9 in June. The domestic economy continues to piggy-back off the health of its number one customer in Beijing and doesn't support the view that the global economy is deteriorating. Bill prices were mixed and if anything edged a basis point lower while government bond prices rose following the weaker environment for bonds created by the weaker than forecast U.S. GDP report released after Australia had finished trading last week. The yield on the 10-year eased two basis points to 5.165%.

Eurodollar futures - Despite the clear slowing in U.S. economic activity, investors appear reticent to chase yields lower in light of healthier activity elsewhere. Front end Eurodollar futures are a tad firmer price-wise although deferred expirations are lower by a couple of points. But an expansion of risk appetite back into the equities arena on a worldwide basis including the U.S. is causing investors to think carefully before making fresh purchases of U.S. notes. The yield on the 10-year has risen by three basis points ahead of domestic manufacturing PMI data and stands at 2.94%. It will be of interest to see how investors translate the number given the fact that it will likely represent a twelfth consecutive expansion for U.S. manufacturing activity amid all the talk of a slowdown.

British gilts - The pound did all of the legwork today following another strong performance by UK Plc. The still strong manufacturing expansion reading came in at 57.3 and although representing a slip on June the data depicts an overall health pace of growth that's arguably on just coming off the boil. And while there is little in any recent data to suggest the central bank is thinking of lifting a finger, yields shifted up by a couple of basis points across the curve. September gilt futures dropped 19 ticks to 121.32 to yield three basis points higher at 3.35%. Short sterling futures dipped also to imply firmer yields along the strip.

European bond markets -Euribor futures eased by one point as wholesale cash prices rose by a smidgeon. The Eurozone manufacturing PMI data also helped buoy economic confidence sending September bund prices scurrying to a 36 tick loss where the contract stood at 128.19 with a yield of 2.70%. The data improved upon both the forecast and the June reading giving investors cause to scratch their heads about the curious health of the core manufacturing sector. European stocks were driven around 2% firmer by healthy bank earnings. While core European bond prices fell those of peripheral nations whose spreads spent the spring and summer widening against Germany continued their move back in line today.

Canadian bills - Canada is having a day off.

Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com       

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