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The Interest Rate Brief by Andrew Wilkinson at IB:

Bond prices found a sudden bid after data showed tame price pressures and a resumption of consumer demand for imports in the United States. Yields fell indicating that the market is growing comfortable with the view that central banks are less likely to pursue aggressive policy changes as harder-hit western economies continue along that good old rocky road to recovery. According to market sources there is healthy demand for U.S. debt from a major west-coast investor this morning catching out an already short market, which may be exacerbating the jump in bond prices.

Eurodollar futures – Eurodollar futures were higher ahead of U.S. trade data, which showed a wider than forecast deficit. However, the combination of strengthening consumer demand and static prices helps accommodate the data set. Bond yields declined with the 10-year note futures posting an intraday price gain of 12 ticks forcing yields three basis points lower to 3.81%.

European bond markets – German bund prices are sharply higher at 123.00 as appetite for fixed income returned. There is, however, no negative response to the very positive Greek bill auctions earlier in the session. So strong was demand for 26 and 52 week paper maturities that the government of Greece was able to sell €200 million more than it had publicly planned. Appetite for short-term debt resumed to 2009 average demand whereby more than six-times the number of bids was received for six-month maturities and more than three-times the number was received for one-year paper.

Despite the successful auction some doubts remain over how far the EU has fixed the problem. Market rates have fallen at the 10-year part of the Greek bond curve. Yields have now slipped 51 basis points in the first two days of the week, although they are still significantly higher than where Greece could borrow directly from the authorities. Euribor futures are a couple of ticks higher in afternoon trade following a positive slew of German inflation data in-line with forecasts for stable prices at both consumer and wholesale levels.

Japanese bonds – Japanese government bond declined by two basis points as regional stock markets gave back a chunk of recent gains.

British gilt – June gilts are higher despite a widening in the trade deficit and evidence of rising home prices amongst today’s data. Both provide additional confidence in an improvement in consumer finances although the easing market interest rates hardly reflect that today. June gilts rose 32 ticks to 114.11 where the yield eased by one pip to 4.03%. Short sterling futures rose by around four basis points.

Australian bills – It was another solid session for Aussie market rates after the RBA Assistant Governor told a Senate hearing committee that rising interest rates were coming closer to normal. Dealers perceived that the futures market is now well-positioned given the amount of tightening already implicit across the curve. 90-day bill futures added four basis points while 10-year bond prices rose to allow a six basis point decline in yields to 5.76%.

Canadian bills – Canadian government bonds added 12 ticks in the June contract to 116.91 sending the 10-year yield lower to 3.64%. Bill prices at the shorter end of the curve found it harder to rally following signs of strengthening global demand in today’s trade report in which the surplus jumped. That indicates a jump in demand for Canadian exports via minerals and raw materials. Dealers are hunkering down for a rate increase from the Bank of Canada by June 1, where the odds of an increase according to market yields stands at 50$ compared to 40% a week ago.