For choice global bond prices are marginally lower in mid-morning U.S. trading hours by it has to be said that ahead of Friday’s employment report, yields have come to a virtual standstill. A mid-morning service sector reading from the ISM showed that the service sector finally returned to expansionary territory last month, dragged higher by ongoing manufacturing activity.
I noted in the Daily IB FX View earlier that both driving forces affecting currencies might be unlikely to retain their influence and that’s evident in bond prices today. There is no slide in Japanese government bonds over fears that new Finance Minister Naoto Kan will wreck plans to rectify an ugly budget deficit. Nor is there any flight to safety in German bunds following the Stark warning that Greece should not expect fellow members of the Eurozone to reach into their own pockets to rectify its own wayward fiscal position.
Yields could be said to be in equilibrium following the recent surge that has lifted the U.S. 10-year benchmark rate from 3.16% to 3.90% in the space of five weeks. Adding to the negative tone on top of more illuminating economic data was the might voice of the world’s largest bond fund Pimco. Fund managers there have stepped back from risk, but specifically have lightened up massively on U.K. and U.S. government paper for fears that the recovery will leave a glaring spotlight fixed on a weakening fiscal position and one that will conceivably be harder to plug without the concession of more appealing yields.
Earlier this morning the private ADP report revealed an estimated 84,000 jobs shed during December. This is the smallest number since March 2008 but also carries the suggestion that service sector employment rose by 12,000 during the month. The report also revised down the number of jobs shed during November from 169,000 to 145,000. While the report was relatively positive although marking the 23rd consecutive net decline in private sector jobs the magnitude of construction job losses at 52,000 and manufacturing job losses at 42,000 still gives the Federal Reserve plenty of latitude to maintain words of caution.
Eurodollar futures –Eurodollar futures are mixed today with the front end remaining higher while the back end is soggy in price terms. The June 2010/ June 2011 calendar spread for example has widened three basis points as the yield curve becomes marginally steeper. In comparison to the day before the release of last month’s labor market report the yield curve has indeed steepened sharply. The June contract went into the data trading at 99.425 (0.575%). At the time the 10-year yield stood at 3.38%. In the event the report revealed a mere 11,000 job losses sending Eurodollar prices on a downward trajectory until this week. At the close of the year June reached a low at 99.29 or yield of 0.71%. However, the contract is heading into the Friday number at precisely the same point as it did one month ago. Meanwhile the yield on the 10-year remains far higher at 3.77% today. Finally the June10/11 calendar spread stretched all the way out intra-month to a high of 165 basis points – far steeper than the 138 basis points one month ago.
As much as the market wants to chew over what is perhaps an illusion of monetary tightening, Eurodollars don’t seem prepared to discount a nearby move from the Fed.
Japanese futures – JGBs slipped 14 ticks to 139.12 but the movement was more in line with global trends rather than any out-of-hand reaction to the retirement of Finance Minister Hirohisa Fujii. Yields rose to 1.34% on the 10-year at one point during the session and should the approach to fiscal policy change away from the staunch example displayed by Mr. Fujii’s when the Deputy Prime Minister kicks his legs under the desk at the Ministry of Finance, yields could rise further. For now, the market isn’t betting he will expand the deficit.
European short futures – Selling pressure in German bunds is now intensifying after the U.S. ISM reading turned treasury futures lower this morning. Bunds are at session lows of 121.26 with the yield at 3.38%. The European short remains higher after the Eurozone PMI services data came in marginally higher last month compared to November. The data indicates continued expansion.
British interest rate futures – A decline in a confidence index at the Nationwide building society is helping short sterling futures enjoy a four-tick rally into the close. Nearby rate increase expectations continue to be wrung out of the market. The September contract is trading at 98.66 carrying a yield of 1.34%.
Australian rate futures –Aussie bonds yields rose three basis points overnight as a strengthening dollar crystallize dthe view that the economy is still expansionary. That thought might yet spur the Reserve bank into action once more in early February when it convenes. Strong building permit data in both public and private sectors helped spur bond selling today.
Canada’s 90-day BA’s – The Canadian bond future is lower by 37 ticks at 118.01 and yields 3.58%. Firm commodity demand is lifting sentiment once again towards Canadian assets. The short end of the yield curve continues to steepen in the same fashion described by the Eurodollar market.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. firstname.lastname@example.org
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