Monetary policy has been cut to the bone. Governments can’t sustain easier fiscal policy because they failed to sock-away enough for rainy days like this when the times were good. Quantitative easing ultimately needs investors to follow the potentially costly lead of central banks and governments as they tried to pull the horse by its nose out of the swamp. Each of these measures for helping fight the recession and counter subdued recovery has limited potential looking ahead. That was today’s warning from the IMF as its Deputy Managing Director served up a stark warning as to why now is a good time to leave the planet and move to another solar system. Failing that, we can rely on demand for Chinese exports and stretch the difficult years a little longer.
Eurodollar futures – Global yields are higher on Wednesday. Risk aversion seems to have run out of steam despite the dour words delivered in Singapore by Mr. Naoyuki Shinohara of the IMF. The focus ahead appears to be testimony to be delivered by Fed Chairman Bernanke as he reports to Congress with his assessment of the health of the economy. Later on Wednesday investors will hear from all 12 Fed districts as to the localized state of regional markets in the Beige book. As noted yesterday, nobody seems to be listening to the increasing number of red flags from FOMC members who collectively raise the distinct possibility that rates will have to be raised at some point.
Eurodollar futures continue to allow for a steeper curve with yields falling at the front and rising at deferred contracts. The September 10-year note future is weaker by half a point this morning boosting the yield to 3.22%.
European bond markets – There are no expectations that the ECB will announce any policy changes on Thursday when it concludes the June monetary policy meeting. The press conference promises as always to be entertaining. Euribor futures mirror the path of U.S. counterparts with a minor steepening of the curve in evidence. The yield on the 10-year German bund fell to a record low in Tuesday’s trading while today the September futures contract has declined by 52 ticks to 129.27 where the implied yield has risen to 2.54%.
British gilt – The next big event for the U.K. will be the budget in two weeks time in which the government will detail plans to cut spending in an effort to reduce the debt burden already equivalent to 11.2% of GDP. Already the markets have warmed to the Conservative party’s approach who appear to understand the gravity of the situation. The gilt market pared gains made earlier in the week and yields backed up on Wednesday to 3.50% as investors watched a modest rebound in risk appetite, which included a surge in the value of the pound as euro-related pressure subsided.
Japanese bonds – The Nikkei fell over 1% in midweek trading and investors remained on the defensive boosting the bid for bonds. The June 10-year JGB future rose to 141.15 sending yields down by three pips to 1.19%.
Canadian bills – What’s good for the local dollar is possibly bad for Canada’s government bonds, which slid 42 ticks to 121.20 in Montreal. If a Reuters report suggesting a surge in Chinese exports is right, then commodity demand is alive and kicking. Moreover, so is global demand. That thought provoked a rally in the loonie today and saw dealers sell 90-day bills down by five basis points as the yield curve made a parallel upwards shift. The U.S. to Canada spread remains at its recent high of around 12 pips.
Australian bills – The Aussie bond market possibly reacted more to the news from Singapore from Mr. Shinohara than it did to a later story from Reuters suggesting a 50% surge in Chinese exports during May. Aussie yields possibly fell as further evidence emerged suggesting weakening business confidence while mortgage lending data also cooled suggesting that monetary policy was biting. The 10-year government bond slipped by three basis points to 5.29%.
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