IB Interest Rate Brief: Earnings disappointment boosts bond appeal
Bond prices responded to flexing Asian equity markets on the prospect of a rethink by China on its restrictive policies now the pace of expansion has moderated. However, equity index futures buckled on disappointing earnings headlines from Goldman Sachs whose numbers look worse thanks to a recent SEC fine and British banking tax. Bonds have since regained their upward move as equity prices weaken while a sliver of optimism was to be found in a construction report reflecting an increase in the number of building permits.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis
Eurodollar futures – Short-term interest rate futures continued to inch gradually higher following a construction report showing a worse than hoped for showing for housing starts, which declined by 10% in June. May data was revised higher, while the number of building permits issued grew by 2.1% in a sign of potentially better days for builders ahead. The end of the government incentive in April to potential buyers has clearly left its hallmark on the market where buyers rushed to conclude purchases of new homes. September Treasury note futures rose 10 ticks by 10am ET to stand at 123-11 yielding 2.91%. Two-year yields matched a recent record low as investors buy shorter-dated maturities in the expectation that the Fed isn’t about to budge anytime soon.
European bond markets –September bunds have rallied 21 ticks to 128.94 while better gains were made by peripheral government bond markets as yields sank as much as six basis points at the 10-year horizon. While European bond markets are currently sailing on calmer seas, the same can’t be said in Hungary where the government’s failure to budge on its deficit reduction plans concluded in no agreement at weekend talks with the IMF. That lack of endorsement immediately closed the door on the cash lined up to assist Hungary’s financial situation. Yields are on the increase and the currency is under pressure.
British gilts – Yield gains are lagging in the gilt market after data indicated the health of the British deficit didn’t fare as well as was hoped. Data was intended to show a decline but in the event the deficit rose to £14.3 billion for the month of June. September gilt futures are 17 ticks higher at 121.37 to yield 3.32% while short sterling futures are lower by a basis point across the strip.
Japanese bonds – After a long weekend Japanese equity prices bucked the regional trend, instead responding to a stubbornly firm yen, weighing the prospects on exporters’ bottom lines. However, bond yields failed to push lower and instead rose by a basis point to 1.08%.
Canadian bills – The Bank of Canada primed investors not to expect a string of further interest rate increases when it announced a quarter-point increase in a statement today. It said that further adjustments would be “weighed carefully against domestic and global economic developments.” Bond yields fell sharply with the 10-year bond trading at its best price of the day at 128.88 where the yield has reached 3.10%. That narrows the gap over comparable treasury yields to 19 basis points. 90-day bills of acceptance futures heeded the stable outlook and rallied up to eight basis points. The year-end future now implies a yield of 1.20% compared to an official benchmark cash indication of 0.75%.
Australian bills – Optimism about the second half performance of the Chinese economy forced Aussie bond prices down shifting yields a whole 10 basis points higher to 5.20% overnight. China is Australia’s biggest customer and market talk focused on the potential for the Chinese authorities to ease off the brake pedal given the calming in the pace of expansion. Aussie 90-day bill prices also shifted to reflect higher yields after the RBA minutes revealed a desire to await the outcome of a European banking stress test report due at the end of the week. The central bank thought it prudent to weigh those results alongside inflation data due to be released next week before contemplating further monetary tightening.
Senior Market Analyst
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.