Thursday August 5, 2010

Government bond prices advanced following weakness in initial claims data that leaves dealers in purgatory ahead of the official non-farms payroll data on Friday. The recent string of weak U.S. data was scotched on Wednesday by an unexpected surge in the key services sector. Even after the potential for further conflicting data from the labor data, investors will be forced to sweat it out in to next week as they await a statement from the FOMC as to whether the economy is sufficiently weak to command more assistance.

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Eurodollar futures - A blip higher rather than lower didn't help recovery theories gain traction on Thursday. Not only did the 479,000 insurance claims rise instead of fall, but the reading was accompanied by an upwards revision to the previous week's data. Eurodollar futures made cautious gains of a couple of ticks while September treasury futures six ticks to 123-26 to imply a yield of 2.93%. Fears that only a slowly recovering labor market will lengthen the duration of easy monetary policy has recently sent investors reaching out across the maturity horizon in a dash for yield.

Japanese bonds - The mild recovery in Japan and rising stock prices weighed on sentiment in the Japanese bond market and sent prices for government bonds tumbling overnight. The 10-year yield jumped back above 1% where it closed yesterday for the first time in seven years. The end of the week will bring an leading index of business conditions and predictions for a stable outcome argue against a recent slide for yields. The September JGB future shed 31 ticks to a close almost at the day's low at 141.98.

European bond markets - An IMF statement sounded positive for the government of Greece and improves the odds of it securing the next phase of a loan agreement of €9 billion. The IMF noted the positive progress Greece has made with implementing its austerity program, which governs the next phase in securing IMF assistance. The bad news for those peripheral nations has recently declined in volume as investors have gently channeled money back in to sovereign debt forcing yield premiums to decline relative to German government debt. Today investors arrived at a Spanish government auction clutching fistfuls of euros enabling the government to easily carry off a successful three-year auction at rates significantly below the previous one held in June.

September German bund futures rallied 30 ticks to 129.50 as buyers forced the 10-year government yield lower to 2.58%, while shorter maturities continued to fall as implied yields rose by three basis points. At today's press conference ECB chief Trichet heralded the available third quarter data pointing to better than forecast numbers as proof that the recovery was robust. He also noted that conditions in the money markets were also improving perhaps preparing the path for removal of liquidity tools during the remainder of this year.

British gilts -The Bank of England left its main policy rate at 0.5% today and made no alterations to its bond purchase policy, which concluded in March. Gilt prices continued to rebound spurred on by weaker U.S. initial claims. Short sterling prices were static while the September gilt future rose 55 ticks to 122.44 carrying a yield of 3.25%.

Australian bills - Firming Asian stock prices and a continued rebound for commodity demand helped guide 90-day bill prices lower as implied yields rose three basis points. Aussie government bond prices slipped following through on global bond weakness midweek.

Canadian bills - Canadian government bond yields eased two basis points to 3.14% matching the decline in U.S. treasury yields.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com       

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