A reversal of fortunes for U.S. equity markets following a stellar fourth quarter growth report helped buoy U.S. treasury prices at the end of last week, although there is little additional impetus on Monday. Indeed the tone of comments made to London’s Financial Times by St. Louis Federal Reserve president James Bullard tends to reverse perhaps some of the fears evident in declining equity markets. Mr. Bullard relieved investors by saying that the days of worrying over a period of deflation have very likely passed. His comments also offered support to the view that the first half of 2010 might deliver employment gains and above average growth. In turn, treasury notes are lower this morning with a 10-year yield of 3.64%.
Eurodollar futures – Eurodollar futures too are nursing marginally losses of one or two basis points. Yet the one-month drop in short-term yields has lifted the December contract from 98.40 to 99.00 where the market currently implies three-month Libor at the end of 2010 will be just 1%. Investors have been swift to price out interest rate increases so far this year after the People’s Bank of China started nibbling at the edges of its rampant recovery with lending restrictions. The money market is also starting to focus more on today’s delivery of the U.S. budget where a $1.6 trillion deficit for the year represents a 10.6% equivalent slice of GDP.
European short futures – The Eurozone is still having a hard time getting away from the fiscal devastation caused by the explosion surrounding the finances of the Greek government. Despite a firmer reading to Eurozone PMI today, investors continue to buy core European debt. The stronger tone to the euro is also helping buoy confidence today. Peripheral European nation debt yields have narrowed compared to French and German bonds on Monday with the Greek spread over Germany narrowing from more than 400 basis points late in the week to 344 points today. The 10-year German bund yield is down two basis points to 3.17%, while euribor futures are lower at the front and higher at the deferred maturities.
British interest rate futures – March 10-year gilt futures rose 12 ticks to 115.78 in the March contract sending yields down to 3.89% as the market focused on the negative potential impact of a relapse for the domestic housing market. A decline in mortgage approvals in December and evidence of a year-over-year decline in home values from estate agent Hometrack Ltd. today weighs heavily on the lackluster British recovery. Interest rate futures have rallied on this data, choosing to ignore the jump to a 15 year high for a manufacturing sector index exhibiting robust growth in the industrial sector. Later this week the Bank of England decides its latest move on interest rates, with no one expecting a change to short-term rates. However, as the end of its £200 billion bond purchase plan comes to an end, investors are hoping that the Bank will signal no further need to buy bonds going forward. Rather they are hoping for an end to the Bank’s policy of quantitative easing.
Australian rate futures –The RBA is expected to deliver a 25 basis point interest rate rise Tuesday to leave short term rates at 4%. Many anticipate that the neutral rate for the Reserve Bank will be 4.5%, but acknowledge now that the risks to this scenario are to the downside. In other words the Bank may signal that it is no rush to get to its stopping point or that this point may be lower than the market currently projects. Bill futures have been rallying recently and on Monday added a further six basis points. The March contract stands at 95.62 or 4.38% while year end futures imply a yield of 5.02%.Ten-year notes were unchanged to yield 5.37%.
Canada’s 90-day BA’s – Signs of a healthy recovery in the United States have taken something of a toll on Canadian yields. The 10-year yield continues to rise as bonds sell off again on Monday, where a 34 tick loss for the March futures contract has lifted the yield to 3.36%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com
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