Interest rate monitor: Bonds higher ahead of Volcker

Bond prices around the world are firmer on Tuesday. Some of the credit for that might go to the Reserve Bank of Australia after its policy makers left interest rates unchanged at 3.75% telling the market it wanted to reflect on the impact of its three earlier rises before considering acting again. Despite strong evidence around the world from purchasing managers data at the outset of February, traders are convinced that interest rates are not going higher anytime soon. Meanwhile a lackluster opening for U.S. equities is keeping demand for yield in positive territory today. Adding an extra twist to proceedings today is White House advisor and former Fed chairman Paul Volcker who makes an appearance before the Senate Banking Committee to defend President Obama’s proposals to rein in risks.

Eurodollar futures – U.S. futures have rebounded form earlier in the losses after one media source reported that the so-called ‘Volcker rule’ would be significantly modified or dropped. Upon its announcement in January, risk aversion helped send yields on the 10-year note down sharply to 3.55%. Today yields are back to 3.63%. Eurodollar futures are marginally higher on the day with the December contract edging slightly under 1% after data for pending home sales showed a 1% gain for January. Year over year the data shows a 10% gain.

European short futures – Little activity has yields flat on Tuesday. German bunds pared earlier losses to 123.18 in the March contract with the 10-year yield back to 3.19%. Euribor prices are marginally firmer.

British interest rate futures – Gilt futures are two basis points lower at the March 10-year contract and currently trading at 115.81. The yield is slightly firmer at 3.90% as investors bide time ahead of Thursday’s Bank of England decision on interest rates. The change investors are hoping for is the end to the Bank’s asset purchase program, also known as quantitative easing. Short sterling futures are higher by two basis points.

Australian rate futures –The surprise inaction at the RBA in leaving interest rates unchanged inspired a surge in 90-day bill prices. The entire short end of the yield curve was swift in taking a 20 basis point swan dive – almost exactly what the RBA failed to deliver. It wouldn’t be fair to say that the RBA paid no attention to firm domestic data. After all rising retail sales have been supported by falling unemployment while at the same time fuelling price rises. Rampant Chinese growth, which accelerated to 10.7% in the final quarter of 2009, has added a twist to the Australian growth explosion. The question is whether or not the recent meddling with its liquidity provision at the PBOC materially impacted the decision making process in Sydney.

The slide in the value of the Aussie dollar in the immediate aftermath was the work of longs that were forced to painfully depart positions today, not necessarily those disappointed by the failure of the RBA to boost the already favorable yield available by owning the Aussie currency.

Bill prices gained most at the March and June contracts, both up 20 basis points with the March contract implying a yield of 4.19%. The current year-end implied yield on the December contract at 4.84% fell 17 basis points today.

Canada’s 90-day BA’s – Bills are higher by three basis points on a yield-friendly day with few other influences apparent until Friday’s Canadian employment report.

Japan – JGB yields rose in response to a strong second day for equity prices with the Nikkei adding 1.4%. 10-year yields rose to 1.35% in the face of an attractive ¥2.2 trillion auction of bonds. It was a successful auction where the number of buyers turning up to buy could have bought 3.6 times today’s issue.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers.

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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