U.S. treasury futures remain buoyant and close to the highest traded prices this week after a disappointing reading for retail sales data during the final month of 2009. Heading into the report bond yields remained pressured to the downside after the Fed’s Beige Book yesterday reported creeping recovery across a further two regions bringing ongoing expansion to 10 of the 12 Fed regions. The modest pace of recovery is helping keep a lid on recent pressure that saw investors ditch bonds mercilessly over fears of a faster-paced recovery bringing forward a possible string of interest rate increases.
Despite a sharp upward revision to the reading of November’s retail sales, today’s advance reading of retail sales for December showed an unexpected decline of 0.3% dashing hopes that consumers would buck a moribund economic picture and do what they typically do each holiday season. Initial claims rose by 11,000 but the trend of increasingly lower employment fallout remains a consistent trend. Today’s labor market numbers leave investors in limbo. Job conditions signal mercurial improvement, while sales data is likely to frustrate investors hoping to build on recent equity market gains in hopes of anything other than tepid economic conditions. One has to conclude that bond and equity prices must be about right at current levels, with low interest rates likely to fuel only a gradually improving picture over time. Without evidence of more robust recovery equity prices will struggle to rise, while the present pace of data will only serve to frustrate bond bears looking for higher yields.
Providing further support to the lower yield environment this morning is a PBS Nightly News interview with William Dudley. The New York Fed president basically invites listeners to keep guessing at when the Fed would need to raise interest rates, but he doesn’t seem to see it in the cards anytime soon. Mr. Dudley said it could be in six months, one or even two years. With that kind of indefinite horizon Mr. Dudley is helping set the tone to build on further gains in short term rate futures. Interestingly during the interview Mr. Dudley also discussed how the Fed might yet need to revisit its soon to expire policy of acting in the mortgage market. Should mortgage rates move significantly higher and if the Fed judges that such a move would have big consequences for the U.S. economy, it may then agree to step back into the mortgage market to underline confidence.
Although such commentary is hardly a warning shot against the so-called bond vigilantes who allegedly sell short bonds to frustrate governments spending too much tax payer money, it does provide further insight into how Fed officials see the recovery panning out.
Eurodollar futures – The tone continues to improve for Eurodollar futures, where prices are up by around five ticks as yields decline. Prices have recovered from Wednesday’s weak close and are pushing at midweek highs. The December contract is trading at an implied yield of 1.14%. March treasuries are trading at 116-20 where yields are now four basis points lower on the day at 3.75%. The same pace of yield decline at the two year maturity to 0.91% leaves the spread between the two at 284 basis points.
European short futures – Yields are only just coming off intraday highs after the ECB press conference begins. Investors are awaiting president Trichet’s tone on affairs with Greece. It doesn’t seem likely that events will turn into a mud slinging match, with the highest Greek officials already admitting fiscal policy short comings and underscoring the fact that they don’t expect assistance to rectify a domestic problem. German bunds are back to flat on the session at 122.20 after an earlier 121.88 low with yields unchanged at 3.30%. Euribor contracts have edged a point higher in the wake of an unchanged monetary policy stance at the ECB’s monthly meeting.
British interest rate futures – March gilt futures are trading 12 ticks lower at 114.89 to yield 3.96%, while the shorter end of the curve is paring earlier losses. The December short sterling contract is lower in price by two ticks to yield 1.68%.
Australian rate futures –Aussie rate futures have been through the mill this week. Contracts were bought after the implicit Chinese monetary tightening for fears of a knock-on contraction washing up on Australia’s shores, while a wave of domestic dollar purchases confirmed risk appetite was back on. The icing on the cake today comes in the form of labor statistics confirming a further decline in the unemployment rate to 5.5% as employers created 35,200 mainly part-time jobs during December. It was the fourth consecutive gain. Following on from futures losses yesterday, the 90-day bill complex again fell heavily in light of the data overnight sending the odds of a rate increase at the RBA’s first meeting of the year up to 76%. Just 48 hours ago the same odds of a 25 basis point monetary tightening on February 2, stood at 60%. Government bond yields rose eight basis points to stand at 5.58%.
Canada’s 90-day BA’s – Relatively little change to BA’s this morning, as they follow the lead from higher prices for Eurodollar futures.
Japan – JGBs are unchanged with the 10-year yielding 1.32% after data showed raw material costs faced by manufacturers fell for the 12th month in a row. Monthly machine tool orders were also lower despite expectations of a rise for the month.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. email@example.com
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