Bonds face profit-taking while awaiting Bernanke

Bonds are facing a time of indecision on Thursday. U.S. initial claims came in lower than forecast and just as a rebound in confidence among investors for riskier bets around the world began to sap demand for fixed interest payments. Dealing was mixed in bonds as investors await headlines from Friday’s speech by Fed Chairman Bernanke at the Jackson Hole, Wyo. central bank symposium.

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Eurodollar futures – With bond markets currently exaggerating bad economic lows, there is no shortage of investors questioning the recent decline in global yields. In the case of the U.S. 10-year note, this week’s recent low at 2.4880% compares to a 4.00% handle just four months ago as the tanker turns from full throttle to reverse. Thursday’s initial claims data was an improvement on the revised 504,000 first-time claims of the previous week and came in at a lower than forecast 473,000. September treasury futures remain mildly in the black today at 126-00 yielding 2.548%. Eurodollar futures, having fallen sharply over the last two sessions, are making minor gains today. Recent selling has been in response to fears over further tensions across the financial sector and the return to a better risk appetite today supports those gains.

European bond markets – September bunds are heading towards session lows into late afternoon trading in Frankfurt. It’s important to remember that the latest German confidence data released midweek is hardly supportive of lower German yields and as with the U.S. market, the easier path for traders has been to push yields down on weakening external factors. With a lack of follow-through bad news on Thursday, some investors are quick to jump overboard for fear of a wholesale liquidation of recently established long positions. The September contract is now trading at 133.81 having earlier reached 134.35. The short-end of the curve is relatively quiet and euribor futures are on the demise in sympathy with firming long-end rates.

Canadian bills – Canadian BAX futures are suffering today and have thus far slipped up to five basis points as the domestic currency is revived by gains for base metal and crude oil prices. Nevertheless the long end of the market continues to push lower in yield terms with the 10-year government bond future expiring in September rallying by 24 ticks to 127.09 where the implied yield stands at 2.82%. The premium demanded by investors to hold Canadian debt over U.S. notes narrowed by two basis points to 27 pips this morning.

Japanese bonds –Japanese bond yields increased by four basis points overnight to 0.93% as stocks rebounded and the yen weakened. The chatter remains that the Bank of Japan will be asked to ease policy further in conjunction with additional stimulus measures aimed at keeping the economic recovery on track. The September JGB future decreased by 17 pips to 142.89.

British gilts –September gilt futures are 45 ticks lower at 125.94 pushing yields higher to 2.873% after a CBI retail sales report showed that the balance of retailers reporting stronger sales outpaced those reporting weakness. The consensus view was for an overall slide, but the improvement helped unwind some pessimism surrounding consumer prospects. Short sterling futures are mixed with modest gains at the front end contrasting to similar-sized losses at deferred expirations.

Australian bills – Aussie credit markets were rather sensitive on Thursday to a reprieve for risk appetite. The 10-year yield jumped by seven basis points to 4.832%, unwinding all of the previous day’s move. The shorter-end of the curve was similarly out of fashion with implied yields rising by two basis points despite an unexpected decline in data showing a 4.00% drop in second quarter private sector investment.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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