An extremely sharp move in the dollar ahead of the May employment report seems now to be rooted in heightened fears over sovereign risk. A Hungarian spokesman for its Prime Minister accused the former government of lying about the state of the nation’s finance and the economy’s health. The event raised the specter of sovereign risk sending bonds flying high alongside the dollar.
Eurodollar futures – In the event the jobs report showed a 22,000 downward revision to the pace of job creation for April and a suspiciously soft May reading of 431,000, which appears to be lacking in private jobs growth and heavy on government jobs possibly related to census hiring.
The yield curve faces conflicting forces today. Probably the strongest is the ongoing worry over sovereign debt around the world as the Hungarian news hits the air. Meanwhile several Fed speakers have aired view that would typically weigh on treasury prices and boost yields. The dissenting voice at the FOMC, Thomas Hoenig of the Kansas City Fed said that the central bank should raise the fed funds rate to 1% on account of a sustainable economic recovery. His Dallas counterpart Richard Fisher said that while the central bank was not yet ready to pull the trigger on monetary policy they may be “getting closer.”
Ahead of the employment report the Eurodollar strip was slightly lower in expectation of a sizeable job creation report, while the September treasury note was a half point higher with the yield at 3.33%. After the data treasuries soared, doubling gains and sending the yield down to 3.26%. Eurodollar prices built on gains with back-months now up 13 basis points.
Canadian bills – The Canadian employment report bond was more bullish than the later U.S. version. The economy created 24,700 additional jobs were added in May and the reading was almost twice the expected pace. However, the elevated reading in the risk barometer stole from the story today. Already the Bank of Canada has qualified further monetary tightening on developments in Europe. As such government bond prices were dragged higher across the curve with the September 10-year bond up 50 ticks at 121.27 after U.S. data. The 90-day bill strip isn’t facing the losses that would have occurred if the data was driving the story. Instead futures prices are gaining and yields continue to drop.
Australian bills – Even though Australian fixed income had finished ahead of the breaking news from Hungary, short-dated bill prices rose sending implied yields lower.
European bond markets – An earlier report indicated a marginal improvement in first quarter GDP across the Eurozone, but dealers remain cautious about the prospect of sovereign default rather than rapidly antiquating data. Peripheral European government bond yields continue higher while core bonds remain bid. Even the French-German spread widened as the disparate demand left French yields higher while those in Frankfurt moved lower.
The September German bund contract is fast-approaching a contract high at 129.10 today – a price achieved on the last round of panic on May 25. Shorter-dated Euribor contracts continue to display caution over liquidity at the front end but indicate a flatter curve at the back end where gains of five basis points are evident.
British gilt – The same flattening of the British yield curve was the order of the day. Short sterling futures faced a minor loss probably on liquidity fears in the months ahead, while gilt prices jumped. The September gilt future surged in line with bunds and treasuries after the employment reports.
Japanese bonds – The appointment of Naoto Kan as Japanese Prime Minster did nothing for the yen nor yield curve, both of which remain slave to unfolding international developments. Earlier in the week the yen suffered as dealers anticipate Mr. Kan will favor a weaker yen and be faster to limit debt issuance. The fear bid to fixed income today reversed the attitude towards the yen, which rises during crises, and helped peel a pip off the 10-year JGB.
No comments:
Post a Comment