There is very little to trade off today. The U.S. serves up another belly full of seven year notes after Tuesday’s auction went well. Don’t forget that no one said investors have lost their appetite for debt at this point – the reality of a recovering economy and the removal of emergency liquidity measures simply means that at some point official rates will rise. Precisely when remains the number one guessing game in year-end financial media circles. The bottom line remains that recovery, stimulus removal and an ongoing gush of supply means the government faces a rising interest bill on newly minted notes and bills.
An overnight warning from ratings agency Standard & Poor’s over Japan’s dicey debt burden hurt the Japanese yen and along with the continued rise in U.S. note yields, the spread between comparable Japanese and U.S. 10-year maturities stood at its widest in two years at around 250 basis points. The recent dollar outperformance against the yen is largely attributed to the raft of support it’s getting from the rising yield curve.
U.S. stock prices pared heavier losses after the Chicago area PMI came in slightly stronger than expected at 60.1 after a 56 reading in November. Investors had braced for a decline to show a slower pace of expansion. Readings above 50 indicate expansion and below that level show contraction. However, bond prices failed to cede further ground in spite of the report since the materials sector is leading the equity patch lower. Commodity prices are having a hard time rallying faced with the headwinds of a dollar that has once again perked up in light of today’s report.
Eurodollar futures – Having reached 3.87% on Tuesday a mid-morning turnaround during the session is sticking today with yields declining to 3.79%. Eurodollar futures also came back by as much as three ticks.
European short futures – The European short end is mixed. At the very front yields are flat-to-higher, while deferred contracts lost a tick. March bund futures face losses of just 11 ticks on the day with yields at around 3.36%.
British interest rate futures – 10-year gilt yields are back down from a one year high but lost out to Italian yields, which were better favored by investors today. The yield premium available on Italian debt slipped to a discount relative to British debt.
Australian rate futures –Aussie bonds fell again sending yields higher to 5.67%. Bills added a couple of ticks sending yields lower by three basis points.
Canada’s 90-day BA’s - Bills are smidgeon higher and trailing Eurodollar futures. The Canadian yield curve remains poised for a quarter point rise in official rates come mid-year according to the implied yield on bill prices maturing in June, which today reads. 0.77%. Canada has a data free calendar until January.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com
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.
