Interest rate monitor: Narrow bond ranges

Yields at the longer end of the curve are approaching the highest in around six weeks as fixed income investors feel the downside bump of the investing seesaw. With their heads in the clouds global equity prices continue to tentatively seek higher ground as the frequency of positive albeit tepid data outweighs that indicative of a global economy returning to a deep freeze. Greek bond market conditions are improving with two-year yields sliding 17 basis points on a second day of buying by investors agreeing with the words of the local central bank governor’s words. George Provpoulos told reporters that speculators profiting from taking on the weaker links within the Eurozone had lifted uncertainty and caused an overshoot.

Eurodollar futures – There was remarkably little negative impact on Eurodollar futures following the explanation to the Fed’s discount rate increase of last week. As investors weigh up what Governor Ben Bernanke might say on Wednesday as he addresses Congress with the semi-annual Humphrey Hawkins testimony, futures are making small gains. There is a growing sense that the Fed is not about to take back anything from its easy monetary policy stance other than the technical tinkering announced last week.

But while short term futures are heading higher (lower in yield), the longer end continues to suffer. Globally there is less reason for the safe haven bid and that’s playing out negatively in the 10-year U.S. note especially given a record $126 billion on the auction calendar this week. The 10-year yield rose to 3.78% today while two-year yields eased one basis point to 0.89% leaving the spread between the two to widen to 289 basis points. The recent peak of 294 basis points was reached February 18.

Across the Eurodollar strip futures prices are higher by three-to-four basis points with the year end future once again crossing below 1% to yield 0.975%. On the data calendar in addition to the widely awaited Bernanke address is data showing new home sales for January, which is expected to take back about half of the 7.6% pace of losses shown in December. Later in the week data should also confirm an uptick in durable goods orders.

European short futures – The yield on two year Greek government paper slipped 17 basis points to 5.34% earlier today. Clearly there are those who have confidence in the system. Whether that means confidence in the government’s ability to promote a successful austerity plan or whether they believe in the power of an ultimate EU bailout hardly matters at this point. As the Bank of Greece Governor pointed out, markets tend to overshoot and the situation will not rectify itself overnight. However, waiting around for buyers to emerge as a signal to get on board the high-yield train makes little sense, but of course that depends on your view.

Euribor futures are little changed but higher by the smallest amount. Bund prices are trading in a very narrow range to commence the week with March prices trading from a 122.76 high to a 122.54 low.

British interest rate futures – Sterling futures are up a couple of ticks on very little news. March gilts have rebounded from earlier weakness at 113.38 and at a current 113.80 are pushing intraday peaks at 113.85. The money market is today brushing off weekend polls indicating growing prospects of a hung parliament following the early summer national election.

Australian rate futures –Strong performances from Asian and Pacific stock markets was enough to depress the Australian government bond market today with yields adding two basis points to 5.57%. Aussie money market bills slipped three basis points in line with a recently rejuvenated view that the RBA has more rate tightening to perform.

Canada’s 90-day BA’s – Canadian bond prices are in decline with the 10-year yield accelerating to 3.51% as investors continue to rethink the potential for commodity-related growth to trip up BoC plans to maintain stable interest rates through the end of the second quarter.

Japan – Japanese yields rose to 1.33% as the Nikkei again surged by more than 2%. Data later in the week should show continued growth in exports as overseas markets recover. The March JGB declined by just 13 ticks to 139.34.

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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