So today we can officially redefine the word “accord” to encompass the essence of a true bailout. The widely awaited EU statement is delayed but should detail certain positions. We know that the EU stands behind Greece. We know that everyone understands that domestic discord is a problem best solved at home. Ask the Irish if you don’t believe me. Irish Prime Minister Brian Cowen is very likely seeking the comfort of a pint of Guinness as he agrees to come rushing to the aid of Greece. Severe domestic spending cuts were required of the Irish government after it ran into a similar budgetary mess last year. What we probably won’t learn until next Monday is the financial aspect of who must dig deepest into their pockets to get the Greek drama off center stage. European government bond spreads have narrowed indicating a reduction in fear.
Eurodollar futures –A larger than forecast decline in initial claims in the United States coupled with falls in readings for continuing and extended claims are all welcome news for the U.S. economy. Nevertheless neither bond nor Eurodollar prices have slipped far from the recent trading range, with the latter continuing to rebound today. The December contract implied a 1.02% yield by year’s end, while the 10-year yield is back into the middle of a range at 3.70%. Bernanke’s prepared statement midweek maintained its use of the term “extended period” and although the topic of the remarks addressed the ultimate removal of easy policy, dealers are not taking the discussion nor the recent data as significant enough to herald any changes in policy. March 10-year note futures slipped below 118-00 yesterday as the volume of news about EU accord swelled. In theory there is less need to hold safe haven government debt, but just by watching the price action of the euro itself ahead of the press conference you can see that fear has not yet evaporated.
European short futures – German bund yields are two basis points higher at 3.22% as investors are swift to unwind recent positions long of bunds and short of Greek, Spanish and Portuguese government paper. Portuguese 10-year bonds rallied substantially to see its yield decline by 15 basis points to 4.37% while Irish government bonds shed 10 basis points in yield to 4.65%. Euribor prices are little changed.
British interest rate futures – U.K. gilts appear to be driven by growing concern that a weaker pound might be necessary in order to address a widening trade deficit as Britain continues to feel the cold shoulder when it comes to a growth rebound. A cheaper pound makes gilts less appealing until the exchange rate adjustment has taken place. March gilts fell by 80 ticks to 114.91 sending the 10-year yield higher by seven basis points to 3.99%. Short sterling surrendered about three basis points of yesterday’s rally inspired by a dovish tone to an earlier in the week inflation report from the Bank of England in which the governor failed to rule out further quantitative easing.
Australian rate futures –A shocking surge of 52,700 additional jobs in January sent implied yields on 90-day bills surging on Thursday as investors reopened the case on further interest rate increases. Economists expecting a 5.6% rate of unemployment were pleasantly surprised by a decline to 5.3% making it the lowest reading since February 2009. Ahead of Thursday’s employment report the money market indicated a 27% likelihood that the Reserve Bank would lift rates by a further quarter point at its March meeting. In the aftermath of the report, the dramatic 14 point sell off in bill futures in Sydney increased the odds to 50%. Bond prices also slipped hard sending the 10-year yield to 5.50%.
While the data is welcome news for Australia’s booming economy it comes at a time when inflation is already relatively high and certainly above the target range of between 2-3% set by the RBA. The average CPI reading for the fourth quarter was 3.4%. Investors are fearful that further declines in the unemployment rate to between 4.5 – 5% might spark further worrisome inflationary pressures.
Canada’s 90-day BA’s – The 10-year yield on the 10-year Canadian government bond rose by two basis points to 3.44% with the spread beneath equivalent U.S. notes narrowing marginally to 26 basis points. The better tone to risk today is likely behind a four point slide in 90-day bills of acceptance.
Japan – Japanese 10-year yields stood at 1.31% during a national holiday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. firstname.lastname@example.org
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