Bond prices are staging a late afternoon rally in Europe and an out-of-the-blue surge in the value of the dollar is creating a sense of rising risk aversion. The Greek budget appears to have found the support of various factions across Europe and a sense of calm had returned to markets today.
Eurodollar futures –A decline of 29,000 in the weekly initial claims data on Thursday allowed pressure to build on Eurodollar futures as bond yields continued a gentle climb. The fall to 469,000 initial claims through Saturday helped somewhat soothe investors’ fears that the nascent recovery in the labor market had stalled prematurely. Better news was evident in a reading of continuing claims, which declined by 100,000 to 4.5 million. Dealers now await the official data on Friday, which is expected to show a decline of 59,000 jobs. We await better weather in order to iron out the quirky nature of current data.
With equity markets continue to improve and the ongoing Eurozone mess creating a roadblock to both growth and a removal of liquidity measures, interest markets are fast concluding that the world can only get better based upon the current direction of growth. Investors eyeing a 2.5-3.5% GDP range for the United States this year are starting to sense that such a scenario will inevitably lead to a removal of low interest rates at some point. The bias towards higher rates appears to be drawing more investors’ thought process with deeper ongoing losses for deferred futures contracts than at the short end. Today June and September expirations are two-to-three basis points lower in price while further maturities are lower by five-and-a-half pips forcing the curve to steepen. June treasury note futures are rallying off earlier weakness and stand at 117-12 to imply a yield of 3.62%.
Canada’s 90-day BA’s – The last time September Canadian bill futures traded with a yield above 1% was January 20. During the last five sessions yields have risen by almost one-quarter of a percent as dealers respond to a variety of driving news. The Bank of Canada is upbeat and its view is underscored by strong growth and a faster than anticipated return to the target rate for inflation. The market today predicts that within one year the three month cash rate will have risen from 0.5% to 1.85%.
European short futures – The ECB left rates unchanged and after the Greek budget there is a bit of an easier tone. It would seem that the danger of a Greek collapse has now passed and by making the Greek government hold its hands over the fire, the EU has helped forge a sense of reality delivered by the austere budget. The Greeks responded today by announcing the issuance of €5 billion of euro-denominated bonds at 300 basis points over German debt. The end game here is to create the conditions that allow the government to finance its debt needs. Some of that must come from budget measures and some must now come from the market. There is no sense in brandishing those investors who tried to ditch the euro currency in hopes that things would blow apart. And it appears that business may be getting back to normal.
British interest rate futures – the Halifax reported weakening home prices for February, while the Bank of England revealed no changes to either monetary or its quantitative policy today. Gilt prices continue to rally in late afternoon trading with the June contract 21 ticks higher at 114.67. Short sterling futures meanwhile are around three basis points lower in price.
Australian rate futures –Bills prices dipped by a basis point while government bond prices advanced to shave two pips off the 10-year yield, which fell to 5.47%. Shanghai stocks slumped 2.4% as a major bank announced that 2010 new lending would be half of the 2009 rate. Meanwhile a narrowing in the trade deficit showed iron ore exports were especially strong in January.
Japan – Barely a budge in the JGB yield down to 1.315% as stocks eased 1% in the Far East. Capital spending data showed a - 17.3% decline for the final quarter of the year – not as bearish as the 18.4% forecast.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com
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