BONDS

The down day for bonds came a little bit faster than we'd anticipated in Tuesday's commentary. Although the news was mixed across the globe, the main driving force was a rebound in global equity prices. Chinese stocks turned around while Japanese stocks stopped falling.
 
Still, German bund prices fell and sent yields higher for the first time in seven trading sessions as investors reacted to a 16-month high in a key survey showing a rebound in analyst and investor optimism. Granted some of the kick here is likely a result of recent data showing a lift in export-led growth, but it was bullish for the euro and gave a green light to equity buyers.

The yield on the key 10-year bund rose to 3.29 after the ZEW index jumped to 56.1 - well beyond forecast - after a June reading of 39.5.
 
British gilts also fell after data showed a sticking point for consumer prices at an annualized 1.8% pace. Expectations for a 1.5% pace were dumfounded and while the day's data delays a decline beneath 1% by a little, the Bank of England's own forecast predicts that event is likely to happen this year. Gilt yields at the 10-year rose to 3.66.
 
U.S. yields reversed some but not all of Monday's gains. Once again the predominant rationale for selling bonds Tuesday was the reversal in equity market prices. The supporting data for the North American market actually augured well for lower yields on the face of it, but the clear loss of steam in the risk aversion trade was evident.
 
Wholesale prices - those paid to producers as goods leave the factory dropped by the largest amount on record at an annualized pace. The decline of 0.9% in July compared to a 1.8% gain in June, with weaker energy prices in July the big drag.
 
Housing starts surprised on the downside as investors faced disappointment that starts actually declined by 1% on the year. Within the data starts of single family homes, which is the largest component, rose by 1.7% over June data. The rally in equity prices coupled with some, albeit a dubious sign of housing market strength drove 10-year U.S. yields up to 3.52%.
 
If nothing else, Monday's decline to beneath 3.5% on 10-year notes was likely sufficient reason for fixed income bulls to take profit towards the bottom of the yield range.
 
Supply concerns loom large across all nations. The German government has spend around 85 million euros in stimulating its economy, while Britain's Debt Management Office has 14 more auctions over the next three months to aid plug the government's £220 billion budget shortfall this year.

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Tyche Research