Interest rate monitor: Treasury prices lower

Bond bears sat on U.S. treasury prices on Thursday after U.S. initial claims data revealed a 6,000 decline in weekly jobless data to 439,000. The number of continuing claims rose a little further confusing the importance of the series ahead of Friday’s March employment report. Bond markets will be open for a shortened session in the U.S. while equity markets face a day of rest for Easter, while European traders will be absent until Tuesday.

European bond markets retained a bid even as Greek bond prices firmed easing pressure at least at the 10-year maturity. Eurozone manufacturing data released earlier continued to indicate a healthy pace of expansion, while the reading of German data also impressed with a hearty reading.

Yet traders are reticent to let go of the life raft offered by core German bunds, where yields close to record lows indicate that a worsening of the sovereign debt crisis lurks somewhere in the background. The unspecified agreement agreed recently in which EU members agreed to provide financial aid to Greece in conjunction with aid from the IMF has created something of a Pandora’s Box. The positioning by the parties as lenders of last resort has failed to quell speculation that Greece can sell enough debt to by pass forthcoming bond maturities. If it can’t raise enough buyers for bonds at still elevated yields more than 3% above comparable German maturities it might default. We now know that under such circumstances the EU-IMF should step in. But the very presence of this tag team is meant to convince speculators that a default will be prevented.

Simply put, the 340 basis point yield premium over German bunds tells us that the present course of action isn’t working. Speculators seem intent on finding out what’s inside Pandora’s Box, and the real danger is that if they force a default that lasts a virtual nano-second forcing an EU-IMF purchase of the remaining portion of unsold debt, the panic ought to subside immediately taking away the supply of Greek debt and forcing the spread to collapse. Wishful thinking? We’ll only know it when we see it.

Japanese bonds rallied to begin the quarter as dealers took advantage of a four-month high for yields at 1.40%. The less pessimistic tone to the quarterly Tankan report was anticipated by investors and was not overtly bullish and didn’t sugar-coat the recovery, at least not enough to spark higher yields instead. The Nikkei index rose to an 18-month closing high.

British gilt prices surged as optimism grew surrounding the likelihood of a majority government at the summer election. The Prime Minister has to give at least one month’s notice for a general election that has to be held by June, but is widely expected to be held on May 6, which means his deadline for such timing is next Tuesday. A Metro-Harris opinion poll revealed a 10% lead for the opposition Conservative party that would be enough to give them an overall majority government in the summer. June gilt prices rose 26 ticks to 115.01.

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.

comments powered by Disqus
Check out Futures Magazine - Polls on LockerDome on LockerDome