Friday's U.S. employment report sent U.S. yields to the highest since June 2009 as fixed income traders considered the implications for Fed policy as job growth returns. The $82 billion in weekly auctions suddenly takes on a whole new face as investors are forced to decide between the allure of rising yields in an otherwise low-yield environment, and the prospects for capital losses in the event the bear market takes a deeper grip.


Eurodollar futures - Since the non-farm payroll report Eurodollar futures have shed about 10 basis points. However, the slide appears to be relatively contained as if dealers remain confident that the Fed will stay good on its promise that policy needs to remain accommodative for quite some time ahead.

U.S. 10-year notes have deepened losses today to lift the yield to 3.96%. The 52-week peak is at 4% reached in June and today it certainly feels as though the economy is much further down the recovery path. So long as there is a sense that the Fed might ratchet rates up starting later this year, there is a very good chance that dealers will let bond prices fall (yields rise) until yields reach 4.25%.

European bond markets remained closed for another day after the Easter break. Trying to predict the European response is a difficult task. The jump in U.S. yields will surely drag European yields higher as the odds for a bond bear market shorten. However, German bunds were still heading for the basement even in the aftermath of a resolution of financial aid for Greece. But lingering worries remain about the scope of the package. There seems an unsettled sense among dealers that the package must be opened before they can be convinced that a sovereign debt default by the nation is of minimal consequence. Until the embers can be doused it appears that European bonds will outperform U.S. debt. Let's see what kind of a yield jump for Germany transpires from Thursday's closing 3.08% when markets reopen on Tuesday.

Japanese bonds - A rise in the stock market inspired by optimism over earnings for exporters was accompanied by a decline in bond prices. The perceived need for the safety of fixed income diminishes as economic optimism abounds. 10-year JGB yields rose by three basis points to 1.37% and closer to the established resistance at 1.4% that has marked a boundary for bonds since late November.

British gilt - markets are closed for Easter, while the pound's rally continues on optimism for a definite political majority after the summer election. This ought to be a beneficial factor for gilt prices, although it's not going to gain traction if dealers do turn bearish on global bonds.

Australian bills - On Tuesday the RBA meets to decide on whether or not to raise interest rates again. Australian markets remained closed over the Easter break.

Andrew Wilkinson

Senior Market Analyst