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Complex Events Lift Yields At The End Of Torrid Week

 March 18, 2011 11:20 AM

Bond prices have swung between gains and losses overnight as a complex of financial and geopolitical factors tripped up traders around the globe. Asian markets welcomed the success of a central bankers? agreement to tame the rampant yen. Speculators had almost dared for intervention by pushing the Japanese unit to its highest ever in the aftermath of the earthquake. The relief from a lower yen stoked a recovery in sentiment and a rebound for stocks. Bond prices suffered from a drop in the perceived need to hold government paper following. However, a unanimous United Nations vote to use air-strikes against Libya further jolted bond-buyers into action.

Eurodollar futures – But Libya's leader suddenly woke up to the international response and offered peace talks, which saw oil prices reverse an early jump back above $103.00 per barrel. At the same time dealers reckoned that there was likely to be less demand for the safety of government debt and started selling paper. With the stock market repeating gains it made on Thursday the June treasury note future has consequently put in a fresh low for the day to reach 120-12 to yield 3.30%. Earlier in the week the yield slid to 3.15%. Eurodollar futures are mixed with contracts expiring over the next 18-months holding on to slim gains while deferred contracts are a couple of points lower as implied yields rise.

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European bond markets - The June bund contract has traded in a 70-tick range buffeted by complex factors capable of tripping up the most experienced trader. Currently the price is lower at 122.73 to yield 3.18% but between potential nuclear catastrophe and a civil war in Libya anything could happen even before the weekend arrives. The calmer nature of events today is leading to minor losses for euribor contracts of three pips as investors wake up again to the prospect of imminent monetary tightening by the ECB.

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British gilts - A slide to at least a seven-year low for sentiment according to the Nationwide building society's consumer sentiment report dampened interest rate expectations and maintained a further rally for short sterling futures. Implied yields fell once again with 90-day futures rallying by five basis points. The strip continues to display a significant degree of monetary tightening and with the year-end future inferring a three-month cash rate of 1.35% the central bank would have to tighten three-times over the next eight months to fulfill those expectations. Having said that, sentiment has softened over the last eight days with dealers paring expectations from 1.60%. June gilt futures are the stand out amongst the crowd this morning, alone in making price gains sending yields lower. The contract reached a session high at 118.66 and currently yields 3.53%.

Canadian bills - Canadian bills might have reacted more positively than they did to a below expectation reading of consumer prices for February but a heavier Eurodollar complex weighed on sentiment. The latest Bank of Canada core pace of inflation came in at 0.9% dropping from 1.4% in January and providing further ammunition to the argument that monetary policy is set appropriately. Today's three basis point rise in implied 90-day bill yields is a drop in the ocean on a net-30 basis point dip in expectations since one week ago. The June government bond future slipped by 11 pips to 121.55 to yield 3.17% and 12 basis points below comparable U.S. treasuries.

Japanese bonds - The G7 accord to pull the rug from beneath the yen in the aftermath of gains in response to the earthquake and ensuing nuclear disaster weighed slightly on government bond prices. The 10-year JGB future settled three pips higher at 139.73 to yield 1.20%. Vice Finance Minister Igarashi said that the government's worst fear is for a slide in the yen and a jump in yields following the disaster as Japan now has to issue bonds to pay for rebuilding cities torn to shreds by the ravaging tsunami.

Australian bills – Intervention in the currency markets provided much needed relief to Japanese stock prices extending to the entire region. The ASX 200 index rose by 1.2% to close a rocky week. The diffusion of bottled-up fears took some of the steam out of government bond prices and in Sydney caused yields to rise by six basis points to 5.48%. The shift in expectations was mirrored along the curve with 90-day bill prices falling by the same amount.

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