Interest rate monitor: Short end rates underperform

A fresh blowout for Greek government bond prices, despite a warning from its Finance Minister that speculators would lose their shirts, is keeping world bond prices afloat and yields down. Nevertheless investors are treading carefully amongst global short end rates where evidence continues to mount supportive of an inevitable end to near-zero interest rate policies among central banks.

European bond markets – The stress on domestic Greek government bonds is clashing with otherwise rising European stock prices. Investors are trying to second-guess when, if ever, the various domestic governments will ratify previously agreed upon EU assistance to Greece. The dribble or assistance is sparking fears in the local bond markets that the crisis has yet to run its course and that a default or even a debt rescheduling might yet be on the agenda. This has served to underpin a demand for the safety of Germany’s fixed income, where two-year yields have slipped to 0.84% and the 10-year yield is down to 3.04%. Meanwhile similar Greek yields have surged once again to 13% and 9.30% in today’s trading.

Eurodollar futures – The escalating Euro-region drama is helping inspire some limited treasury market gains to start the week with the U.S. 10-year note picking itself up of the floor after a dousing last week. Yields have slipped to 3.78% in early Monday trading with the June future rising 10 ticks to 116-24. Meanwhile Eurodollar futures are three ticks higher with the March 2011 contract continuing to rebound from Friday’s low at 98.81 (1.19%) and is trading at 98.85 (1.15%) in early trading.

Japanese bonds – A 2.3% rally for the Nikkei 225 amid growing confidence in the regional rebound helped depress bond demand on Monday. The June future slipped by nine ticks by the close but avoided a larger decline having bounced off an earlier 139.15 low to close at 139.27. The 10-year yield is 1.31%. A weaker yen is also symptomatic of investors seeking refuge in potentially higher yielding assets overseas.

British gilt – Gilts are enjoying a rally helping depress the 10-year government bond yield down six basis points to 3.97%. The flattening shape of the curve is evidenced by sustained losses for short sterling contracts, which rose 20 basis points over the course of the week as investors continue to react to a sharp rise in core inflation pressures for March. The December contract is higher by a tick today at 98.82 (1.18%) in comparison to a 0.5% base rate at the Bank of England.

Australian bills –The Australian yield curve flattened with short-dated futures adding a basis point while government bond prices added four basis points to yield 5.83%. Rising commodity prices were supported by a weekend newspaper article in China Business suggesting the government will redouble a 2009 stimulus effort to the tune of $586 billion to sustain its domestic recovery. That’s good news for Australian resource exporters and comes at a time when domestic economic health vilifies remedial action from the local central bank.

Canadian bills – Canadian government bonds continue to rebound from last week’s Bank of Canada policy statement, suggesting tighter monetary policy is on its way. The spread between comparable 10-year U.S. and Canadian bonds narrowed to 20 basis points today as Canadian yields eased less than dollar yields to stand at 3.68%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. 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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