IB Interest Rate Brief: Yields range close to home
Yields are relatively static with dealers reluctant to sell bonds towards the top of the recent yield range for lack of evidence that central banks will normalize monetary policy anytime soon. Nevertheless they appear reluctant to dive deeper into the traditional safe haven offered by fixed income on signs of revitalized growth around the world. Providing a counterweight to a midweek report from the Fed indicating modest growth at best is a series of rising European confidence measures today casting the light firmly on the Eurozone as the surprising bastion of growth.
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European bond markets – Confidence indices rose as business attitude towards the economy and service sector surprisingly rose throughout July. A business climate indicator also gained confirming a return to healthier levels of activity rising to its strongest level in more than two years. The German Federal Labor Agency reported a thirteenth-straight dip in unemployment as the economy added 20,000 more jobs reducing the rate of unemployed to 7.6%. The last time this rate was so low was in November 2008. Short end futures didn’t respond negatively to the improving labor market, indeed easing a few basis points instead. September bund prices remain higher although only just in the middle of a narrow intraday range at 127.89.
Eurodollar futures – The Beige Book from the Fed’s 12 districts was largely as expected and failed to show any real signs of improvement. For now investors must suffer through lackluster economic data while the real fireworks appear in corporate earnings press releases. Initial unemployment claims fell by 11,000 from an upwardly revised 468,000 count the prior week. The September note future is unchanged at 122-28 yielding 3.02% this morning while Eurodollar futures have made minor price gains.
British gilts – Softness in British lending data including a drop in mortgage approvals helped gilt prices rally. The yield on the 10-year government bond shed five basis points to stand at 3.43% while deferred short sterling contracts added five basis points as implied yields declined. A Nationwide survey of home prices reported a 0.5% monthly decline to leave prices 6.6% better than a year ago. More stringent credit requirements from banks eager to heel their balance sheets are deterring would-be borrowers.
Australian bills – Yields edged higher in Australia despite a lack of news. Stock markets were buoyant and a rally in the Aussie brought on by returning risk appetite saw a natural sell-off in bill and bond prices. 90-day bills shed five pips while the government bond yield added three pips to 5.23%. It’s also worth pointing out that yields slumped midweek on a relief that consumer price data rose by less than expected. Today’s pullback was possibly some light profit-taking.
Japanese bonds – A strong yen failed to put off stock buyers on Thursday while bond buyers returned after a jump in yields midweek. The 10-year JGB dipped to 1.066%.
Canadian bills – Investors continue to play a long Canada position over U.S. notes. The spread narrowed on account of a rise in treasuries while the bid behind Canadian government bonds saw yields ease by one basis point to 3.21%.
Senior Market Analyst
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