Interest rate monitor for Jan. 15

IB Interest Rate Monitor: Global bonds rally to round out the week

Global bonds are up in a curious week dramatized by acceleration in monetary tightening in China. Its move was a pre-emptive measure to curb the excesses of its own rescue plans from morphing into the next asset bubble. The effects of that move turned out to be short-lived in terms of only temporarily reducing risk appetite but still investors are now left clutching at straws looking for any signs of growth. Japanese bond yields slipped to the lowest in a week after data showed weakness in U.S. retail sales last month. If growth peters out to a plateau, expect a further bond market rally.

The yield rally was further accelerated on Friday as tensions appear to mount between the ECB and the government of Greece. This story remains a rehash of what we already know. For its part the government of Greece has admitted its shortcomings and today submitted its deficit reduction strategy using spending cuts and tax increases to help cut a deficit of more than 12% of GDP. The aim is to reduce this percentage back to within the 3% EU guideline as soon as possible. For its part the ECB continues to try and get its message to Greece. Whether this is for the benefit of reporters when ECB president Trichet speaks, I’m unclear. Mr. Trichet today underlined that the ECB will not tailor its collateral rules at the end of this year to satisfy the needs of any single nation. If debt issued by Greece doesn’t carry a sufficient credit rating at the end of 2010, it will be shunned by investors unable to use it as acceptable collateral into 2011. Typically yields rise to compensate investors, but the grade of the bond is the ultimate arbiter here.

Since Wednesday the yield on the two-year Greek government note has accelerated from 2.90% to 3.70% - an 80 basis point swing. Meanwhile ultra-safe German debt at the same maturity has benefitted from the rise in bond prices this week with its yield falling eight basis points to 1.12%. The spread between the two has widened by 88 basis points in two days to stand at 258 basis points.

Eurodollar futures – The sanguine tone passed over to American markets this morning with neither consumer price nor industrial production data changing the picture from one of tepid economic growth. Treasury notes are at the highest price in a week and testing the upside after a heavy week of issuance during which a 30-year auction attracted the heaviest demand in four months. The March t-note is higher by over half a point this morning at 117-09 where the yield has dropped six basis points overnight to 3.68%. Earlier in the week the yield spread between two and 10-year maturities had widened out to 290 basis points. Today the spread has narrowed to 280 basis points as the curve is massaged lower and flatter by investors’ trades. The December Eurodollar contract is higher by four ticks with the yield just nine basis points north of 1% - its lowest since December 1.

European short futures – German bund prices are at a three-week high sending the yield at the 10-year down to 3.27%. Euribor futures are also two-to-three ticks lower.

British interest rate futures – 10-year British government debt shed a further two basis points today to 3.95% sending March gilt futures higher by 36 ticks to 115.14. The British data calendar was clear and in a sense the focus on Greece and its possible impact on peripheral member debt is a relief for Britain. Such focus allows the pound and the government’s own fiscal folly some breathing space.

Australian rate futures –Yesterday’s strong retail sales data possibly cemented the path to a further rate increase from the RBA early in February. However, the reaction yesterday seen as bill futures were sold looked overdone to traders this morning in light of the comedown for global yields. Hence bills are up six or seven ticks to close the week. The yield at the 10-year government note slipped just one basis point into the close at 5.57%.

Canada’s 90-day BA’s – A strong Canadian dollar does little for short term money traders. The local dollar reached its highest in at least three months in Thursday’s trade and if anything that tightens overall monetary conditions. The Bank of Canada announced several quarters ago that it wouldn’t change its policy stance through the middle of 2010 and right now that looks like a statement that can’t be challenged. Today 90-day bill prices are up a couple of ticks while Canadian government bond futures are higher by 49 ticks to 119.19 sending the yield down by four basis points to 3.51%.

Japan JGB prices matched the highest in a week allowing yields to slip to 1.32% on signs of a plateau for global growth. The March JGB future rose to 139.11.

Andrew Wilkinson

Senior Market Analyst 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.

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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