Interest rate monitor: Bond markets look to Fed

IB Interest Rate Brief: Yields patient ahead of Bernanke

Investors are keen to hear what Ben Bernanke has to say about the Fed’s exit strategy in Wednesday’s semi-annual monetary policy testimony to Congress. His speech will hit the wires at 10am ET and for the record, Eurodollars are one tick up ahead of the news while March treasury note futures are offered at unchanged on the day. A meltdown in equity prices yesterday inspired by a slide in consumer confidence saw note yields decline sharply from 3.79% to 3.68%. Ever since last week’s after-hours movement to lift the emergency discount rate the Fed has dispatched a series of speakers to downplay the measure and to soothe expectations over any change in official monetary policy.

Eurodollar futures – Traders pricing March notes at unchanged are eagerly waiting to hear how Mr. Bernanke sees the prospects for the economy and whether he will further define the “extended period” phrase. Yesterday St. Louis Fed chief James Bullard said he’d be happy to maintain the phrase in FOMC communications so long as he could interpret it to mean that rates were on hold for at least six months. San Francisco speaker Yellen also reminded Fed-watchers recently that inflation was uncomfortably low and deserving of easy money.

Mr. Bernanke is expected to further address the Fed’s exit strategy. To be honest, the more the Fed puts into a public forum, the better. We want to know what the Fed is thinking about from the perspective of transparency. Currently investors are tussling with the perspective of an exit strategy and a tepid economy. That’s leading to confusion and someone needs to set the record straight that an exit strategy is something done way ahead of time. Perhaps we’ll hear more this morning.

European short futures – March German bund prices are following through on Tuesday’s downbeat IFO business confidence survey and are higher by 25 ticks at 123.92. Prices today reached the highest in 12 sessions as government yields slipped to 3.15%. Euribor futures are firmer by two-and-a-half ticks along the curve.

British interest rate futures – Gilts are the biggest mover today with the March contract up by 70 ticks to 115.16 where the yield has fallen by eight basis points to 4.09%. Investors continue to react to the weak economic prospects meaning more quantitative easing may be on the cards and by definition, more Bank of England intervention to push bond yields down. Sterling futures are higher and more so at the far end of the curve.

Australian rate futures –Weakness in Asian equity prices overnight helped suppress yields on Australian bond and short interest rate futures. The March 10-year bond rose to drive yields down by four basis points at 5.53%. A minor down tick for fourth quarter wage growth likely helped sentiment while money markets are still positioned for a 25 basis point rise when the RBA meets March 2.

Canada’s 90-day BA’s – Canadian markets remain quiet ahead of Bernanke’s testimony with no fresh influences to detract bill yields from tracking those on Eurodollar futures. The 10-year yield is down one basis point to 3.42%.

Japan A 1.5% decline in the Nikkei in response to U.S. weakness helped spark a rally in JGBs where the March contract rose to 139.66 for a 25 tick rally. The 10-year yield edged down to 1.30%.

Andrew Wilkinson

Senior Market Analyst

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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