Fixed income investors are forcing global yield curves to flatten ahead of Wednesday’s start to Mr. Bernanke’s Humphrey Hawkins testimony to Congress. With the mood over in the equity asset class dulled by a downturn in German business confidence, investors are left wondering what is likely to support economic growth and growth in earnings. With subdued activity comes less argument for changes to monetary policy. Even news of a sustained bullish outlook for Australia failed to shift investor focus away from the slow pace of growth in future quarters around the world.
Eurodollar futures – Weakness in equity prices ices a moribund economic picture. Fixed income investors see little prospect of strong enough data that would knock the current view that the Fed remains on hold. March t-note futures are seven ticks higher at 117-13 sending yields down to 3.77% as the yield curve attempts to flatten. Along the Eurodollar strip gains are more noticeable the further out you look and while March is unchanged, the deferred March 2011 expiration has rallied 4.5 basis points allowing the curve to flatten once again.
European short futures – March German bund prices jumped 50 basis points following a weak IFO business confidence survey. The data raises the question over just how strong the first quarter of 2010 is and prompted the IFO economist to predict a first quarter contraction.
Euribor futures rallied swiftly with yields on the decline by around six basis points at the March 2011 expiration. With nearer expirations gaining slightly less the yield curve continues to flatten in light of weaker economic data. The money market is also concerned by what steps the ECB will take as it tries to stick to its plans in reducing reliance on the fixed repos expiring in June. The ECB is due to comment on its plans next week.
British interest rate futures – Bank of England Governor King threatened further doses of quantitative easing in the event the economy doesn’t pick up. The dour outlook for the British economy, where he described the risks to a central view as being to the downside, was described to a Parliamentary committee in London today. The pound weakened while short sterling futures rallied three-to-four basis points and a 38 tick rally for the March gilt contract to 114.35 saw 10-year government bond yields decline by four basis points to 4.18%. The one year calendar spread spanning March 2010 to the same time next year narrowed by three basis points as deferred futures contracts rallied causing the curve to flatten.
Australian rate futures –There was no immediate reaction in the interest rate markets to the bullish speech given by Deputy Governor at the RBA, Ric Batellino. He highlighted the glowing scenario faced by Australia’s mining market stating that the boom might extend in to the 2020’s. And while the Aussie jumped on the news, the recent selling across Aussie 90-day bills in preparation for further interest rate tightening prevented a reactive sell off today. In other words there is a sufficient rate tightening priced into the curve at present. 10-year bond yields closed the day unchanged at 5.57%. Mr. Batellino warned that the country needs to be vigilant in its response to inflationary pressures stemming from the boom in mining output.
Canada’s 90-day BA’s – The Canadian yield curve continued to flatten across the BA complex with the March 2010 - March 2011 narrowing by 4.5 basis points as deferred bill contracts rise faster than the nearest expiration declines. Government bond prices rose 17 basis points to 119.66 where the yield slipped a basis point to 3.49%.
Japan – Japanese yields fell after minutes from a recent Bank of Japan meeting confirmed the central bank would maintain practically zero interest rates and continue buying almost $20 billion of government bonds each month to prod liquidity. The 10-year yield eased to 1.32% and was found further support during the day as equity prices gave back some of the recent gains.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com
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