Global long ends are having a difficult time shaking off the recovery blues and yields are sticky to the upside, while bond prices are finding it hard to shake off tepid economic data. With the benchmark treasury note trading unchanged to yield 3.83% today, it has barely budged in the face of Friday’s weak reading for payrolls showing the loss of 85,000 U.S. jobs. Despite the disappointment that greeted the report in terms of dashed economic hopes, investors today have found solace in the strong reading of Chinese trade data perhaps indicating significant strength in international demand. In the tradition of discounting any signs of recovery investors are buying equities and have no special place for bonds at this point. It’s hard to pull the rug back over the glaring backdrop of fiscal imbalance. That has left yield curves steeper as investors have no problem playing out a delay to any official tightening in monetary policy, but have no concession for the price they will accept to fund those deficits.
Eurodollar futures – At the end of 2009 and admittedly when markets were taking a blinkered view of what the Fed might do, the December expiration Eurodollar future had slipped to imply a yield of 1.58%. But it appears to have blown off the cobwebs since then and on the back of Friday’s labor market data has seen yields slip all the way to 1.28%. Once again the volatility in the interest rate complex provides a great venue for trading out investor views. Such a 30 basis point movement on an outright basis eclipses the price of the fed funds future at 0.25%. So if anyone ever tries to tell you that with such low yields you can’t make money, you now know different!
And although the yield curve has changed shape dramatically since the end of November, any remaining yield bulls have had a hard time during the recent days. The number of job losses, especially when investors were looking for confirmation of a more positive trend, would typically have been extremely bond bullish. However, the March 10-year note future closed at 115-25 on Thursday before the numbers and is only trading at 116-01 this morning. While this means a steeper yield curve, the running is being done at the very short end.
That’s hardly surprising given the confirmation from St. Louis Fed president James Bullard, who said over the weekend that interest rates may remain low for quite some time to come. The challenge for bond traders now is what might happen next. Arguably the bond market just had its best couple of news sound bites – weakness for consumption and the Fed still trying to talk yields lower. So what will it take to drive the curve down if neither of these things work? A stock market collapse perhaps?
European short futures – There is not a lot to go off in terms of Eurozone activity to begin the week. A Financial Times report apparently warns that Portugal may face a Moody’s credit rating agency downgrade without credible remedial steps to its existing fiscal plan. Bund futures have now risen sharply given the relative weakness on the opening of U.S. equity markets. March bunds are up 37 ticks at 121.77 where the yield is lower at 3.36%. The euribor strip is lower in yield by around six basis points.
British interest rate futures – A better environment for short term rates has lifted short sterling futures this morning. A couple of private surveys depicted a mixed bag for the conditions that private and financial companies reckon they face. Combined with a retail survey from the CBI still showing a net drop in business sales volumes looking forward, the conclusion is for a moribund economic picture. Unlike treasury prices, gilts are higher rising 51 ticks to 114.52 to yield 4.03% for a two basis point drop in yields. Meanwhile the short end is up in price along the curve sending yields up to 10 basis points lower out at the March 2011 expiration. In the same fashion as the U.S. curve, the British curve continues to flatten led by gains at the short end.
Australian rate futures –A jump in job vacancies to a two-and-a-half-year high in December alongside the robust trade volume data from China is having a negative impact on Australian fixed income prices today. With Australia being China’s biggest export partner the surge in the volume of raw materials for December has positive implications for the Australian economy and therefore negative ones for interest rates. While the yield on the 10-year government bond remained unchanged at 5.67% to start the week, the shorter dated bills dropped four basis points indicating that the market still remains nervous over the prospects for further monetary tightening. But there is still an awful lot priced into the Australian curve. Short rates at 3.75% compare to an implied year-end yield of 5.40% on current prices.
Canada’s 90-day BA’s – Canadian government bonds are higher by 11 ticks to 118.39 where the yield is 3.60%. Once again investors continue to buy short term bills as yields push lower in expectation of a prolonged freeze for official policy. Data showed stronger housing market activity as the seasonally adjusted number of housing starts rose to 174,500 units December compared to an expected reading of 160,000 starts.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. firstname.lastname@example.org
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