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Interest rate outlook by Andrew Wilkinson at IB:

A muted U.S. inflation report met with a robust reading of retail sales for March bringing U.S. bond prices to a standstill. A punch from either was enough to leave investors wondering which corner they should side with. The data was better received by equity markets where an earlier rally for index futures was extended ahead of Wall Street’s official opening as investors discounted an improving economy. Meanwhile European bond markets remained mixed with Greek yields reversing optimistic gains and heading back down again. Core markets rose.

Eurodollar futures – Eurodollar futures are a tiny bit lower after a 1.6% rise in U.S. retail sales. Ex-autos the data was also firm showing a 0.6% rise in sales excluding cars and light trucks. The CPI data showed a minimal 0.1% change in the monthly pace of price inflation for a 2.3% pace of increase year-on-year. Ex-energy prices were unchanged on February to leave the annual pace higher by 1.1%.

June treasury note futures are unchanged at 116-18 to yield 3.82% while Eurodollar futures expiring in December are trading at 99.20 showing an implied yield of 0.8%. Later this morning Fed Chairman Ben Bernanke will reveal his latest thoughts on the economy at the Joint Economic Committee at Congress.

European bond markets – European fixed income remains under stress, or at least that’s the case for peripheral bond prices, which are falling under the weight of pessimism that Greece will tap the EU and IMF offer of financial assistance. Some large bond market participants have made public comments to the tune that they are steering clear of higher-yielding Greek issuance until they can be sure that there will be no public backlash in those nations essentially funding the bailout.

Greek 10-year yields reached 7.07% for a 27 basis point rise on the day as Portuguese bonds fell lifting the same maturing yield nine basis points higher to 4.41%. Italian and Spanish bond yields added a couple of basis points. All of this helped inspire a bid once again for Germany’s benchmark bunds where the June contract rose to 123.23 sending the yield down to 3.12%. Earlier in the day Eurozone industrial production data exceeded expectations by rising at a 4.1% year-over-year pace.

Japanese bonds – While weakness in the Japanese yen might have the ultimate impact of bolstering Japanese growth it did no harm to Japanese government bond overnight, which declined in yield by a basis point to 1.35% despite rising signs of stronger regional growth.

British gilt – The British yield curve steepened for no apparent reason on Wednesday. Short sterling futures rallied by two ticks indicating a slower pace of monetary tightening ahead, while gilt prices dropped seven ticks to 114.00 in the June contract to yield 4.04%. The backdrop of an uncertain election and what the outcome might mean for British fiscal policy remains the main market wobbler at the moment.

Australian bills – The Australian yield curve responded to a Westpac consumer confidence reading, which remained stubbornly close to a three-year high. A string of interest rate increases has apparently had less of an impact in denting consumer psychology than the central bank may hope. The money market subsequently sent yields a couple of basis points higher with a deeper wound for the 10-year government bond, which rose in yield terms by five basis points to 5.81%.

Canadian bills – The Canadian dollar surged again today as evidence continues to pour out of the Pacific Rim indicating ongoing strong demand for natural resources. The evidence creates a conflict between the paths of Canadian and U.S. monetary policies because the Canadian economy is better exposed globally to benefit from recovery. Bill futures slipped a couple of basis points with the December expiration currently implying a yield of 1.86% compared to a benchmark short-term interest rate of 0.25%. Government bonds prices also eased by 13 ticks to yield 3.69%.