Interest rate monitor: Bonds pressure lifted

Equity prices seem unable to push higher independently of convincing news that would maintain yesterday’s charge. Meanwhile bond prices have given way to marginally positive news both in Europe and the U.S. In looking for the best phrase to describe today’s market action where we can use neither risk appetite nor risk aversion, we’ve built a new fitting description. The best phrase would seem to be appetite-aversion avoidance and best describes the meandering action ahead of further key data later in the week.

Eurodollar futures – A downwards revision to a private employer reading of December’s payroll data was step one of a dual positive report from ADP. The January reading showed a 22,000 payroll loss across employers that it provides payroll services to and compares to a prediction of a 30,000 decline. The report buoys sentiment ahead of Friday’s official BLS statistics, which may show job additions for only the second time since December 2007. Since that time the U.S. economy has lost 7.2 million jobs. A separate survey from Chicago-based Challenger Gray and Christmas showed a 70% reduction in the number of planned firings in January compared to one year ago.

Within today’s ADP report, the most encouraging piece of evidence is the fact that service providers added 38,000 positions during January and while net losses within the goods producing sector easily outpaced this reading, the improvement continues. On Thursday initial jobless claims are slated to show 455,000 individuals made first time claims through last weekend.

The U.S. treasury announced a calendar full of as much as $81 billion in notes and bonds to be sold at auction next week, which adds to a continual torrent of issuance. Yields on 10-year notes rose to within a couple of basis points of the highest in two weeks at 3.68%. Eurodollar futures also managed to give up about four basis points in yield as nervous investors sold the curve. The December contract currently trades at 98.96 (1.04%).

European short futures – One has to feel rather sorry today for any 65-year old Greek government drivers responsible for fuelling their own trucks. The European Commission today supported the plans submitted by the government of Greece, but said that Athens needs to go further in order to ensure the plan gets worse. This provided support for bonds issued by the government and allowed fixed income markets to breathe easier. With that, however, comes some light profit taking meaning that core bonds were largely sold across the Eurozone today.

Greek Minister George Papandreou signaled that he was committed to overhauling the domestic tax system in time to improve 2011 fiscal revenues. At the same time he immediately raised fuel taxes and raised the retirement age for state workers. Gruelling measures for many Greeks were well received by the debt market where the 10-year Greek yield fell to 6.54% while two-year yields fell to 6.27%. The yield spread compared to German bunds narrowed by around one quarter of a percentage point to 328 basis points.

British interest rate futures – Sterling money rates are little changed today. Gilt futures are two basis points lower at 115.68 to yield 3.91% while short sterling is higher by a tick in March and June contracts and unchanged along the curve. A positive reading for consumer confidence was countered by a slowing in the pace of service sector expansion according to a pair of well-monitored surveys. All eyes are on Thursday’s Bank of England decision, widely expected to announce at least a pause in quantitative easing.

Australian rate futures –Aussie government bonds rose in yield by a tick to 5.43% as Asian markets rose slightly. Meanwhile Aussie money rates adjusted somewhat with bill prices giving back anywhere from three to 12 basis points of yesterday’s mammoth rally.

Canada’s 90-day BA’s – Bills are lower by a point with the market keen to see whether the Canadian economy can continue to create jobs in Friday’s report.

Japan – JGBs traded in a narrow range. The yield range during 2010 is still rather narrow between 1.30 and 1.36%. The successful auction of bonds this week coupled with ongoing upwards direction for stock indices .

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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