Interest rate monitor for Jan. 5

Global bonds have a far better tone to them today after another Fed speaker, this time Elizabeth Duke, stirred up the notion that an economy operating in many sectors at a below capacity reading will result in stable price expectations. After driving the yield curve up to close to a height braced for near-imminent tightening from the Fed, investors today are having an easier time seeing the woods through the trees. Yields at the U.S. 10-year are lower at 3.78% - a one week low - ahead of data showing a possible third consecutive monthly increase in factory orders. That would be another confirming signal of economic recovery.

European bonds were sluggish although ultimately towed the line and reversed earlier in the day losses. French and German government bond prices faced earlier selling pressures after the EU statistic’s office reported strengthening consumer price increases. The December CPI estimate of 0.9% was up from the December reading of 0.5%. Meanwhile, both nations remain issuers of public debt, which earlier helped depress bond prices before the U.S. fixed income market towed the line.

With global issuance one theme this week, where the Eurozone governments will issue €100 billion this month the big test remains whether the recent push to multi-month peaks for yield is enough to incentivize fixed income buyers to step up and buy sovereign risk.

The other big test comes in the form of the U.S. employment report on Friday, which earlier held the potential to set the cat among the pigeons with a job change range of anywhere between an addition of 59,000 and a decline of 80,000. One week ago, the potential for a shift in yields from the report was unambiguous but now it feels that much of the work has been done by the approach to 4% in the U.S. 10-year. While welcome, news of job creation will likely bring the prospect of a Fed rate rise back to the fore, and that will see a test of the recent yield peak. A calming in the recovery theme might quickly see bond buyers target 3.5% pretty quickly.

Japanese futures – Faced with mounting supply pressures Japanese investors have taken a bearish stance on JGBs recently. Overnight the yield spiked to a seven-week high at 1.33% before buyers emerged to curb losses. Despite the recent announcement from the Ministry of Finance over its fiscal requirements through 2011, dealers feel that the situation at least hasn’t worsened. The growing recovery around the world is positive for Japanese exporters and while the snapback in the value of the yen overnight isn’t necessarily as bullish for them, a rise in the Nikkei Dow overnight helped spur confidence in bond prices.

Eurodollar futures –Eurodollars are building on Monday’s solid gains. For example the June contract is trading at 99.41 implying a yield of 0.59% but has fallen from a 0.71% at the end of trading last week. The curve is once again in flattening mode as investors position for the ongoing heavily-populated auction calendar and most importantly, the December payroll report. This morning the March t-note is higher by 17/32 at 116-02 and yields 3.78%.

European short futures – The European short is higher this morning as investors continue to seek value after recent selling pressures. German bunds put in a major low at 120.84 on Monday with the March contract today rallying to 121.50 where the contract yields 3.37%. Since December 18, the rise in yields shifted the bund future lower from a peak at 123.65 as yields rose from 3.13% to 3.39% yesterday.

British interest rate futures – Short sterling is joining the rally enjoyed by global short ends but investors continue to stay clear of government debt. The onset of the electoral process isn’t helping any as perceived political risk has the potential to leave a powerless incumbent government with little ability to restore fiscal stringency. The March 10-year gilt futures declined by 48 ticks to 114.42 in afternoon trading keeping the yield up at 4%.

Australian rate futures –Aussie bonds enjoyed a sizeable rally as the Aussie dollar rose. The 1-0year yields eased 14 basis points to 5.61%. 90-day bill prices jumped by around 11 basis points with the December 2010 contract now yielding 5.28%.

Canada’s 90-day BA’s – The Canadian bond market failed to stay abreast of gains in the U.S. treasury market but buyers still forced yields down three basis points to stand at 3.57% giving the U.S. 10-year treasury note a 21 basis point premium over Canada. Far dated bills of acceptance are matching the declining yields on Eurodollar contracts.

Andrew Wilkinson is a Senior Market Analyst for 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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