Friday FX Interest Rate Monitor

Despite the rally for stocks on account of a return of risk appetite, bonds remained well-supported heading into the long weekend as investors remained fixated with a view that economic growth will slow on account of fiscal austerity in Europe. Demand for U.S. treasuries was rekindled by a report showing consumer spending stalled during April.

Canadian bills – The Bank of Canada’s decision on setting monetary policy next week will be closely watched with dealers currently mixed. On the one hand the Bank has pretty much already indicated that the monetary ratchet needs to be tightened but that was before investor confidence collapsed. If not at the June meeting money markets will consider a rate increase in the bag at the following meeting. Bill prices at the short end bucked the global trend and continued to trade defensively with implied yields rising by three basis points. The government bond yield dropped two pips to 3.35%.

Australian bills – Dealers also positioned with caution ahead of next week’s Reserve Bank meeting in Sydney. Basking in rising stock markets and affirmation of a conviction that Chinese demand is set to bolster its local economy, investors locked into low rates and sold both short-term bills and Aussie government bonds where yields rose across the curve. Bond yields rose by three basis points to 5.40%.

Eurodollar futures – The June 10-year note added seven ticks to stand at 120-17where its yield dipped by four basis points to 3.32%. Yields at one point eased to as low as 3.06% during the week. Yields on Eurodollar futures declined by up to four ticks as liquidity concerns eased.

European bond markets – Little action to report at the end of a volatile week in which the key German bund yield touched 2.56% before rising to 2.68% heading into late afternoon trading. Euribor futures built on Thursday’s gains as bank solvency issues wane.

British gilt –Gilt prices rallied sending the June futures contract up by 28 ticks to 119.76 as investors pondered whether a dip in the GfK NOP consumer confidence poll portends a dip in economic activity ahead. Short sterling futures continued a rebound with implied yields easing around three basis points.

Japanese bonds – Date pointing to continued deflationary pressures and a rise in the rate of unemployment to 5.1% during April failed to shift bond yields ahead of government auctions next week. A strong yen on account of the sovereign debt crisis has made exports less appealing recently although this is Japan’s engine of growth at a time when the Asian recovery is gearing up. Yields remained static to close the week with the government 10-year bond at 1.239%.