Interest rate monitor for Jan. 28

Fixed income investors are having a hard time Thursday in trying to maintain anything near a perfect 20-20 view on events. While the messages from within the driving forces shaping the current big picture trends are not necessarily mixed, there is a sense that near-term and far-term views don’t mesh following developments during the past 24 hours.

Eurozone yield spreads narrowed somewhat from earlier in the day highs despite a perceived worsening of the fiscal situation this time drawing Portugal into the fray. French newspaper Le Monde reported that France and German were perhaps preparing a conditional rescue package that would deliver financial aid to the government of Greece, but would lay the groundwork for cleaner accounts and Hellenic statistics.

British policymakers have to decide whether short-term inflation pressures will alter the medium to long-term picture for inflation.

U.S. bond yields have nowhere to go but up after Kansas City Fed chief Thomas Hoenig said he thinks we should all be able to see beyond the economic fog. In having personally done so he no longer sees the need to use the “extended period” phrase associated with the setting of interest rates. That may cause a rerun of pressures faced by bond markets at the end of 2009 when they lost sight of the path of interest rates.

President Obama’s State of the Union set job creation and a five-year doubling of exports center stage when he addresses Congress on Wednesday. Until midweek investors had thought that the President was fully focused on reducing banks’ ability to take risk. Once again the focus has been diverted to leave investors with a migraine as they continually try to adjust portfolio balances to best position for the perceived risk environment.

Bond yields responded negatively to the FOMC announcement on Wednesday and are slow to follow through on Thursday following the State of the Union address. However, the rotation back into equities and commodities is taking away from the perceived need for fixed income investments. In the meantime, the bias for short ends of the yield curve is playing out with creeping losses for short interest rate futures.

Eurodollar futures –Initial jobless claims dropped back to 470,000 by last weekend, while the more favorable news was a decline to a one-year low for continuing claims to 4.6 million. Although some companies have recently announced job cuts, such as Verizon, they did note that those jobs lost would need to be replaced outside the company, which means that new hiring is a greater possibility than the bare data suggests. Ford Motor is recalling previously furloughed workers and economists predict a net job gain of 25,000 for January due from the Bureau of Labor Statistics next Friday. Today’s durable goods report lived up to its erratic nature with a 0.3% monthly gain disappointing those expecting the data to live up to its forecast 2% gain. Data ex-transportation beat its 0.5% forecast with a 0.9% jump in new orders. The durable goods data provided some respite for yields although Eurodollar futures are once again paring gains. The 10-year yield is up two basis points to 3.67% with March note futures off 8/32 at 117-12. Yields at the shorter end of the curve have fallen by a basis point with the two year note yielding 0.91%.

British interest rate futures – A reversal of fortune is underway as traders continue to mull the words yesterday of policymaker Andrew Sentence whose words challenge the central bank to tackle the issue of price spikes when it meets next week. Sterling futures are lower by around five basis points while 10-year gilt futures are lower by 46 ticks at 115.49 adding four basis points to yield 3.92.

European short futures – The rate of German unemployment stayed at 8.2% but the number of unemployed rose by just 6,000 in January after a surprise drop in the previous month. A positive set of EC sentiment indicators and words from ECB member Axel Weber discussing ongoing liquidity withdrawal measures conspired to send March bund futures down by 16 ticks to 123.22 where the yield of 3.21% is a basis point higher. Greek yields surged by 24 basis points to 6.98% while Portuguese yields rose 11 basis points to yield 4.33%.Euribor futures heeding the words of Mr.Weber are a couple of ticks easier.

Australian rate futures –Aussie bill prices rose once again despite a gain in risk sentiment. The RBA discusses policy next week. The global shift in bond yields helped send Aussie 10-year bonds higher by six basis points to 5.45%.

Canada’s 90-day BA’s – Canadian bond prices are slightly higher at 3.35% while bills are virtually unchanged in a data-free day for Canada.

Japan – Media reports of a possible 16% increase in government bond issuance through fiscal 2012 didn’t undermine the Japanese bond market and yields were unchanged at 1.29%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. 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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