If you scratch beneath the gritty surface of the sovereign debt crisis, you’ll see that economic recovery continues to edge forward. At the climax of Tuesday’s equity selling and coincident demand for 10-year U.S. treasuries, investors pushed yields down to a one-year low at 3.06%. It’s pretty ironic to learn that buying a million dollars of government notes in the heat of the moment in search of safety would have resulted in a 1.5% loss or $15,000 in a day. Yields at the 10-year surged back to 3.26% this morning as investors stumbled across a few more pieces of evidence to support the theory that beneath the surface, growth is alive and well.

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Eurodollar futures - The OECD's semi-annual report was optimistic in that it boosted its prior forecast and predicted a jump in growth from 1.9% to 2.7% regardless of the stench of the sovereign debt crisis wafting over from Europe. Yesterday the Conference Board reported that its index of consumer confidence rose to its highest since March 2008, while data today showed a 15% jump in new home sales. Earlier, the Commerce Department revised upwards data from March and reported stronger than forecast April data for durable goods.

The fact that global equity markets have recoiled from Tuesday's weakness has provided investors with time to reflect on the health of the economy and has to a small extent at least removed the focus from the messy state of finances in the Eurozone. With a little more faith in the banking system today, Eurodollar futures made minor short end gains while the June treasury note future slumped by 21 ticks to 121-00. 

European bond markets - The recent string of austerity measures that began in Greece and that moved to Spain and Portugal reached Italy today where the government announced a €24 billion package of spending cuts spearheaded by a wage freeze on civil servants. The recovering stock markets helped alleviate the upwards pressure on government bonds. German yields had earlier fallen to the lowest since at least 1989 at 2.56% and have gained eight basis points today to stand at 2.64%. Demand at a German five-year auction was the weakest in two years given the slide in yields recently. Euribor futures made four-tick gains as credit and liquidity fears eased. The June bund contract on the DTB shed 72 ticks as yields jumped with the contract currently trading at 128.61

British gilt -A 15% year-on-year jump in mortgage approvals was welcomed by realtors as evidence of growing sustainability of recovery in the housing market. Gilt futures plunged with the June contract losing 92 ticks to 119.84 where the yield rose to 3.55%.

Canadian bills -Canadian 10-year bond prices faced limited losses with the June future declining by a mere seven ticks to 121.48 where the yield remained almost static at 3.25%. The spread between Canada and the U.S. narrowed from nine to two basis points. 90-day bill prices fell by six ticks as next week's Bank of Canada meeting draws closer and the risk aversion fears subside.

Australian bills - The OECD report contrasted the still strong emerging market economies, notably China, and expressed limited downside to the growth profile for these nations. A rebound for Asian stocks helped soothe demand for the safety of bonds and sent the yield on the Aussie 10-year government bond higher by six basis points to 5.31%. A rise in a Westpac leading index built on an earlier gain and helped soften 90-day bill prices as yields at the short end firmed by around 12 basis points.

Japanese bonds - Yields remained soft at 1.195% although JGB futures bucked the global trend and rose in price. During the course of the next week dealers will bid for fresh government bonds and as such have been net sellers of government bonds recently.

Andrew Wilkinson Senior Market Analyst