Interest rate brief: Jumpy bond market

IB Interest Rate Brief: New York manufacturing slowdown catches bonds off-guard

You can blame rising risk aversion around the world on the failed European budget plans. The accident in slow motion that is playing out across European borders is having the negative impact of countering those measures put in to place following the banking crisis two years ago. And with those measures still showing positive results, the recent crack in the ear from developments taking place in Europe is forcing some player to abandon their calls for rising interest rates as the globe recovers.

Eurodollar futures – T-note futures are well off an earlier low at 119-17.5 after a surprise reading for New York Empire State manufacturing data, which saw a decline from above 31 to an index reading of 19.1. Analysts had predicted only a minor decline to 30 and this report is the last thing an already nervous market needs. The recovery in the domestic economy clearly evidenced by all manner of healthy corporate earnings reports was the logical part of the brain and to a large degree counteracted the Eurozone’s fiscal follies. Simply put, we do not need to see signs of domestic weakness at this stage of the game. Already several analysts have abandoned their call for a Fed tightening before 2010 ends purely on account of the growth offset from fiscal drag in Europe.

British gilt –The gilt markets warmed rather quickly to a Liberal Conservative coalition and rallied sharply last week, outpacing gains in other core markets. Over the weekend the new Prime Minster blasted spending decisions made by the outgoing Labour government in “its dying days” referring to them as decisions that no rationale government would make. Gilts responded negatively with the June futures contract slumping to 117.53 before recovering. It’s unclear whether Mr. Cameron is referring to the tip of the iceberg or simply lambasting his predecessors for political gain.

Short sterling futures continue to reflect ongoing economic stress with dealers in no mood to mull any interest rate increases going forward. The strip is higher by three ticks.

European bond markets – June German bunds have rebounded from a 126.21 low to stand at 126.47 as the cooker-pressure remains in place across Europe. Yields rose firmly at the open but have later come back as have the fears for Europe’s ailing fiscal structure. President at the ECB, Jean-Claude Trichet made overturned to the region’s governments telling them it was time to make quantum changes to the way fiscal policy is set and administered. Euribor futures are four ticks lower as pressure in the cash markets causes higher Libor settlements with rising mistrust between lenders resurfacing.

Canadian bills – Canadian bonds have also reversed course from deeper losses to almost unchanged on the day. The 10-year government yield sits just below the equivalent U.S. treasury yield at 3.43%

Australian bills – Aussie bill prices rose sending yields lower by five basis points as fears mounted that global growth remains under the gun on account of European fiscal pressure.

Japanese bonds – A 2.2% decline for Japanese stocks was half that suffered by the benchmark in Shanghai. Australian stocks slumped by 3.1% while those in Hong Kong sank by 2.1%. I think you get the picture. The Asian morning got off on the wrong foot as the weight of Europe dragged on sentiment but extended the bid for the safety of government debt. The June future rose 13 ticks to 139.98 as the yield on the 10-year JGB declined to 1.27%. Machinery orders in Japan rose in April for the first month in three, while producer prices continued to decline but at an ever-decreasing rate. While both pieces of data were positive together they were hardly sufficient to offset the pace of declining regional stock prices.

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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