The conventional wisdom continues to play out this week sending yield curves higher as investors watch commodity prices and stocks rebound. The collective response following the Dubai World episode appears to be that whatever troubles arose from the Middle East, compounded by woes about sovereign debt in the Eurozone don’t have sufficient gusto to derail growth from a solid first quarter performance into next year. As such yield curves are starting to price in the removal of monetary stimulus in a very subtle fashion.
The rejection of new lows for yields after Dubai is stark. Yields have risen in the U.S. at least from 3.16% to 3.59% today at the 10-year horizon. Any attempt to rally has been quickly met by fresh bond sales. Fresh government auctions don’t seem to be helping any either as supply is piled on. In addition the yield curve now sits perilously close to a move into resistance not seen since August and a break above 3.64% will see bond bears target the range between 3.75% and 3.85%. In the way this week comes third quarter data on GDP and a reading of the pace of personal consumption. Should the data confirm that consumers are holding up well despite rising unemployment, it’s likely that quiet year-end markets will open the door for bears to step inside.
Nobel economics prize-winner, Joseph Stiglitz forewarns that the U.S. economy could turn back down beyond the impact of the current fiscal stimulus program. His position is that the short-lived program won’t reduce unemployment enough to get the economy back to a self-sustaining rate of growth. By the end of 2010 he predicts that Washington will need to have its check book at the ready. Typically bonds might have rallied on this type of legitimate forewarning, but traders already know two things. First, the majority of the primary stimulus has not been spent. Second, Washington has a rather large check book, which it’s not afraid to use.
Eurodollar futures – are lower in line with bonds. The 2-10 year spread is sitting at a six-month high of 276 basis points, which means that the curve is becoming steeper all the time. Longer-dated maturities are selling off at a greater pace for fear of an ultimate monetary tightening. The March 10-year future is off by a half-point to yield 3.59% while front month Eurodollar maturities are lower in price by up to seven basis points.
European short futures – There was little impact after a European Union report predicted stronger growth in 2010 at 1.5%, which makes for a doubling of its previous prediction. March bunds dropped far harder than euribor with the March bund adding three basis points to yield 3.16% while the 90-day contracts dipped just a basis point.
British interest rate futures – Friday’s exaggerated up day for short sterling amid thin trading conditions due to adverse weather and its ability to prevent traders reaching their desks, was reversed gradually on Monday. The June contract is lower by four basis points while the March contract is lower by 10 basis points to yield 2.25%. The March gilt slumped 62 basis points to 115.86 to yield 3.82%.
Australian rate futures –It appears that the catch-up phase for Aussie bill futures has ended and down-under traders are more concerned now with the implications of a murkier picture for shifting rates globally. 90-day bills dropped by four basis points while the 10-year government bond added five basis point to yield 5.38%
Canada’s 90-day BA’s - An inline retail sales report and an upward revision to that of the previous month means that sales have improved for eight of the last 10 months in Canada. That’s an enviable picture at a time when unemployment has risen to an 11-year high at 8.6%. That rate is likely to worsen during the first quarter before falling back ahead of the end of 2010. A strong gain for auto sales (+3%) and a 1.9% rise in clothing sales reminded investors that strength in the Canadian dollar is not turning out to be a negative factor for domestic growth at least. The 10-year yield rose three basis points to 3.44%, while 90-day bills are lower by three basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. firstname.lastname@example.org
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