Interest rate monitor: Bonds decline

An assimilation of the woes emanating from Greece illustrated by rising equity prices across the Eurozone is keeping bond yields from falling further at present, despite weakness in those peripheral government bonds at the heart of the problem. The European Union’s strategy of telling the government of Greece to mend its disorderly finances demonstrates at the same time how determined the union is to carry the nation through this rough patch. Bond yield curves are steepening somewhat on Tuesday in response to creeping risk appetite and data pointing to a recovery moving in the right direction.

Eurodollar futures –A New York Federal Reserve report Tuesday showed a healthy reading of manufacturing activity in the Empire State in February. The index easily surpassed expectations and jumped to 24.9 and helped get equity trading off to a bright start after a long weekend for U.S. investors.

The one basis point rise in two-year yields to 0.84% compares to a two basis point yield rise at the 10-year note to 3.72%. That means the spread between the two has widened out to 288 basis points and within just a couple of ticks of the highest point in 2010. Some of the blame for this steep gradient is due to the uncertainty on what’s happening in the Eurozone rather than any feeling that the Federal Reserve is on the cusp of a tightening cycle. Eurodollar futures haven’t budged this morning while the higher 10-year yield means the March treasury note future is trading six ticks lower at 117-285.

European short futures – Bund futures reached a low at 123.21 early on before the ZEW survey of investor optimism showed that institutional and analyst optimism continued lower for a fifth month. While the data was not as pessimistic as predicted it still reminded investors of the challenges ahead. Still, the EU’s strategy of dealing with the media appears to have eased some of the economic pessimism associated with fears for contagion from Greek debt problems. Euribor futures are down just a haft tick across the board.

British interest rate futures – The March British gilt future rallied to 114.80 after data gave an in-line reading of British consumer prices for January. The spike to 3.5% is well ahead of the Bank of England’s central 2% target, but is caused by the erosion of an earlier sales tax reduction and the impact of its loss from the index calculation. The relief that the spike was predictable helped support the pound and interest rate futures. Any deviation might prompt the market to fear untoward action from the Bank of England in having to rein in wayward cost pressures. As it is the Bank last week revealed little prospect for a change in monetary policy based upon where it sees growth and inflation in two year’s time.

Australian rate futures –Aussie bill prices took another flesh wound after the RBA discussed raising rates to contain inflation going forward. In the minutes from this month’s meeting the RBA said that contained inflation was only possible if it pursued further monetary measures throughout 2010. And while the market already has 1% priced in, bond yields came under some pressure sending the 10-year government bond yield three basis points higher to 5.5%. Selling pressure across the strip saw bill prices about six ticks lower.

Canada’s 90-day BA’s –December manufacturing sales of 1.6% didn’t surpass a slightly higher analyst forecast, but did beat the pants off the November reading of 0.1%. A resumption of rising commodity prices has also lifted the Canadian dollar today and bond prices are noticeably lower. The March futures contract is lower by 28 ticks to 119.64 where the yield has jumped four basis points to 3.5%.

Japan – Monday saw the delivery of Japan’s fourth quarter GDP report showing a 1.1% pace of growth. However, that reading masked a worsening picture for falling prices, which tumbled at a record pace at the same time. Japanese government bond prices rose Tuesday after dealers prepared for a five-year auction by selling some existing comparables and bidding for the fresh issue. Earlier in the day price weakness was reversed and the curve was bid lower (higher bond prices) following an extremely well attended auction. The specter of any possible anti-deflation action from the Bank of Japan is keeping fixed income well bid. A recent appeal by Japan’s Finance Minister Nato Kan to the budget committee at the lower house in which he urged the Bank to do more to prevent deflationary forces has dealers widely anticipating some action from the central bank.

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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