Interest rate monitor: Bonds hindered ahead of auction

Ahead of another heavy U.S. Treasury auction, with today the turn of the 30-year maturity, dealers have sold bonds ahead of time bowing to slightly more favorable economic data. Strong industrial production, retail sales and bank lending data emerging overnight from the Chinese economy coupled to a report indicating a rise in its inflationary pressures, also helped pressure global bond prices lower in turn lifting yields. The distant stench of a possible Greek sovereign debt default also prompted some investors to ditch the safety of German bunds at midday in Frankfurt causing a lurch lower in prices.

Australian rate futures –An improving labor market in Australia spawned by demand for its exports created another excuse to raise market implied yields on Thursday. The almost parallel shift in yields saw two-year note yields 10 basis points to 4.86% while aggravated selling at the 10-year lifted the yield 13 basis points to 5.66%. Recent firm data and comments from Reserve Bank officials have not prodded much movement in the yield at the 10-year horizon, which was more driven by spread activity in line with global prices. However, today’s report seems to have upped the ante somewhat with dealers possibly starting to raise forecasts for the ultimate stopping point at the RBA, widely expected until now to be around 5% by the end of 2010. Bill prices also slipped between six and 10 basis points. At the September expiration the implicit yield rose to 5.11% for a six-week high.

Eurodollar futures –Eurodollar futures are starting to look distinctly toppy. An earlier in the week advance has been thwarted as investors realize that an improvement for stock markets on warming economic evidence means that at some point interest rates will change. That’s despite an ongoing softly-softly approach from various Fed speakers.. Eurodollars are down by around three basis points and with the December contract trading at 99.12 its next target is last week’s 99.085 low before it might take a look at 99.00. June notes are once again on the defensive ahead of the results of this afternoon’s 30 year bond auction. Dealers have sold cash bonds into each of this week’s auctions of three and five-year notes in the hope of buying back new issues at more favorable prices.

Canada’s 90-day BA’s – Bills are mixed along the strip and to sum it up, are unchanged ahead of Friday’s labor market report. Weaker June bond futures lifted the yield at the 10-year by a pip to 3.54%

European short futures – The shroud cloaking European bonds appears to be in the process of disappearing following market observers reduced perception that the government of Greece will default. Heavy German bund volume around midday sent the June bund contract reeling to a low of 122.19 as investors felt less need to seek the safety of core German debt. The 10-year yield rose to 3.19%.

British interest rate futures – Short sterling futures reacted negatively to Bank of England report today suggesting the public perception over the pace of consumer prices is worsening. The average consumer expects the pace of inflation to be 2.5% this time next year. At the time of the last report in November the reading was a notch lower. The data on paper suggests a sooner rise in interest rates, although the Bank of England may discount the survey based upon internal analysis. The futures strip slipped four basis points with the December contract trading at 98.78 implying a 1.22% year-end yield. June gilt prices slumped 65 ticks to 113.54 in European trading marked by less risk aversion surrounding Greece.

Japan A 1% gain for Tokyo stocks pushed government bond yields higher by two basis points to 1.31% after the release of Chinese data that supports the view that the Asian economic recovery remains intact.

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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