Interest rate monitor: Bonds, equities have soggy start

Fixed income prices have eased on Monday after a little confusion at the outset. European stock markets were initially higher until around 6am ET when GM announced the recall of some of its Vibe model over required fixes for possible sticky accelerator pedals wiped out pre-market U.S. futures gains. Bond prices rose, but ahead of the U.S. opening are back towards their intraday lows. The week has all the hallmarks of being a crazy one for bond. The U.S. auctions $81 billion in debt equaling the most it’s ever sold in any given week. The Bank of England is likely to give inflation readings an upgrade in a report due this week. Yields on European debt have fallen to the lowest in a month, while a warning sign comes in the shape of a record number of investors expecting the euro to plunge further, which could be taken as a contrarian signal that the market is about as bearish as it can possibly get over concerns about the fiscal woes facing Greece, Portugal and Spain.

Eurodollar futures –Casting a glance over your shoulder, you might feel that Athens may be distinctly underwhelmed by the global response to its crisis relative to the Dubai World crisis at the beginning of December. The key 10-year U.S. yield at that time slipped to 3.15% at the first scent of blood in sovereign waters. This time round, fixed income buyers have limited the pile-drive down in yields to just 3.55%. Meanwhile the low for the S&P 500 index as it stared at losses was 1029. On Friday the panic selling took the S&P index down to 1044 at worst.

Eurodollar futures are off Friday’s highs and are lower by about three ticks across the curve. The December contract at 99.06 is off Friday’s lifetime peak inferring a three-month yield of 0.875%. March t-notes put in a low at 118-14 earlier and are trading now at 118-20 where the 10-year yield stands at 3.57% - up one basis point on the session. Bond traders are wary of this week’s auctions spanning debts stretching from three-to-30 year maturities although there is no reason to suggest that the U.S. won’t be able to find buyers.

European short futures – The surge in German bund prices on Friday helped drive yields to a closing low at 3.12%. It appeared that investors growing increasingly concerned over a sovereign default somewhere along the southern European periphery continued to seek the safety of German fixed income over very thin Greek, Spanish and Portuguese debt markets. Today the credit default swap markets have calmed a little with the exception of Portuguese debt, where the cost of insuring government debt has become more expensive. Euribor futures are marginally lower on the day.

British interest rate futures – Gilt yields have risen to start the week with investors selling March gilt futures down 48 ticks to 115.54. The yield at the 10-year has risen five basis points to 3.93% as investors grow increasingly concerned that the Bank of England will announce a nasty mix of weaker growth combined with higher inflation for 2010 at least. This week the central bank releases its quarterly review of inflation. In December the consumer price index shocked with a 2.9% increase and January data is just around the corner. As polls continue to show higher prospects for a hung parliament in which neither major political party has a majority, investors are wondering how tough any minority government can be on solving the largesse of the British fiscal deficit. Short sterling futures are lower by three ticks this morning.

Australian rate futures –Aussie government bonds yields rose by two basis points to yield 5.39%. Data later this week will probably open up the discussion on additional interest rate increases when the RBA meets next month if employment continues to make strong gains.

Canada’s 90-day BA’s – There is very little change for Canadian yields with unchanged government bond prices and slightly weaker bill prices keeping yields pegged. Signs of a strengthening economy came today in the form of a 15-month high in housing starts. Expectations were exceeded as the seasonally adjusted annualized pace of starts rose to 186,300 units fuelled by cheaper borrowing costs. The reading was 5.8% higher than December starts.

Japan – A weaker stock market and stronger yen continue to bear pressure on bond yields in Japan, which under other circumstances might springboard higher. The scale of global risk aversion is a nice counterweight to have when issuing trillions of yen in domestic bonds. The March JGB contract rallied 14 ticks to yield 1.34%. Last week yields peaked at 1.38%.

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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