Interest rate monitor for Dec. 29

A paper inviting comments from academic and institutional onlookers released by the Federal Reserve on Monday is the latest catalyst for a continued collapse in bond prices sending yields higher around the world. U.S. 10-year note prices fell lifting yields to the highest since August while the slide in British government bonds continued after a prolonged holiday weekend lifting yields to the highest in 12 months. Once again the trading mindset is being increasingly shaped by an ebullient feeling underpinning rising global equity prices, driving optimism in the ongoing recovery process. Meanwhile rising consumer confidence data released today by the Conference Board confirms a rosier outlook ahead.

Eurodollar futures – The yield on the June 2010 Eurodollar futures contract has risen from 0.5% at the start of the month to 0.69% today after having breached the earlier December lows yesterday. Chicago-traded fed funds futures now imply a 60% chance of a quarter-point raise in rates from the Fed by the summer months. Much of the damage has come in the last three trading sessions, with yesterday’s session causing havoc on account of many investors taking a long weekend. Still, Monday’s volume was high and indicates more bearishness ahead for Eurodollars.

The Fed’s paper outlines its proposed auction process aimed at harnessing some of the excess liquidity on bank’s balance sheets estimated to be around $1 trillion. The Fed will invite banks to “buy” deposits thought to be in the six to 12 month area of the yield curve. Most investors have tried to beat the Fed using the “too much money chasing too few goods” stick. They have accused the central bank of printing money, which in true monetarist fashion will lead to rising inflation. By “mopping up” excess liquidity the Fed aims to avoid such price pressures from ever getting hold in the system. The Fed notes that the paper nor its contents hold any implications for monetary policy decisions in the near term.

But a bond bear market, which looks increasingly identifiable by more and more outrageous predictions from economists, is a tough thing to shake off. The U.S. q0-year yield has surged to 3.85% today as the curve continues to stretch ever higher.

European short futures – European futures spent the session playing catch-up with developments in American credit markets after the long weekend. Euribor contracts are down by as much as seven basis points at the December 2010 maturity where the implied yield is 1.79%. The March German bund contract, which was open for trading yesterday, was steadier today after losing around 40 ticks on Monday. The yield today at the 10-year horizon stands at 3.36%.

British interest rate futures – 10-year gilt yields rose to a one year high in London at 4.11% reflecting nervousness surrounding prospects for global monetary policy in 2010. Far-dated short sterling contracts also felt the backlash with the implied yield at next December’s expiration touching 2% for a 10 basis point rise on the session.

Australian rate futures –Aussie bonds slumped in price after the long weekend. Yields at the 10-year maturity surged by 16 basis points to stand at 5.72%, while prices of shorter 90-day bills slumped by around 20 basis points. There was no domestic data and I’m assuming that it was the combination of rising commodity prices and resurgent demand for the Aussie dollar that sent rate expectations surging. Meanwhile comments promising the maintenance of growth-friendly monetary and fiscal policy from China’s premier Wen Jiabao, Australia’s biggest regional customer iced the cake today.

Canada’s 90-day BA’s - Bills are lower despite a lack of data today. The rise in metals and energy prices today speaks volumes about investors’ optimism over demand for Canada’s natural resources. The 10-year government bond yield is up by seven basis points at 3.66% and is being dragged higher by rising U.S. yields. Bills are down in price by five ticks to yield 1.73% this time next year.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers.

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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