Bonds in limbo

IB Interest Rate Brief: Better than forecast U.S. GDP has little impact on fixed income

Bond markets are relatively subdued with no major market currently able to break the weekly range. Later this morning that might change. Central bankers may offer different insights into the health of the global economy or discuss policy actions that might stray from consensus.

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Eurodollar futures – A second-time around reading for GDP growth through the quarter ending in June was expected to show an unhealthy revision on its release today. The initial 2.4% pace of gain was widely expected to have overstated output by twice its actual value. However, in the event the report was less bearish at a 1.6% pace of output gain. Consumer spending also came in at a more robust 2.0% clip surpassing a predicted 1.6% gain. Despite the slowdown in the pace of growth the news is a welcome curtain-raiser for Mr. Bernanke who is due to address central bankers on Friday morning. September t-note futures already dithering ahead of the data were tipped over the edge and recoiled to an intraday low of 125-225 after its release. Yields at the 10-year edged higher by six basis points to 2.537%. Meanwhile Eurodollar futures are also backing further away from recent dizzy heights with deferred expirations suffering price declines of four basis points.

European bond markets – September bunds have climbed by around 150 ticks during the week as investors continue to buy bunds on fears of economic weakness. Earlier in the week the yield on the 10-year bund fell to 2.09% making another record low. After a pause in proceedings yesterday, buyers overcame profit-taking activity and yields are once again on the decline. German CPI data for August came in marginally weaker than expected at a 1% year-over-year pace driving September bunds to an intraday peak at 134.54 where yields currently stand at 2.127%. Further out along the curve the rally in 30-year bond prices has seen yields plunge by 28 basis points for the biggest drop in almost two years. Fears over the health of peripheral economies resurfaced after S&P downgraded the debt rating of Ireland forcing a wholesale widening of spreads.

Canadian bills – Following the better U.S. GDP report the price of government debt is on the decline in line with U.S. treasury prices. The September Canadian government bond future is trading 10 ticks lower at 127.11 while its implied yield stands three pips higher at 2.815%. There is no news out of Canada today.

Japanese bonds – Tokyo was ablaze with plenty of chatter overnight about two things. Intervention to stem the painful rise of the yen and Prime Minister Kan’s promise to wrap-up his latest package of stimulus measures. The attempts to keep the economy from faltering harmed Japanese bonds where the 10-year yield increased by a sizeable six basis points overnight to 0.99%.

British gilts –Second quarter British GDP was revised marginally higher although the impact appears to be having lesser impact on gilt futures. The September contract has advanced by 33 ticks to 126.33 pushing yields back towards 2.86%. Short sterling futures are unchanged to close the week. Since last Friday the December 2010 expiration contract has slipped by five basis points to 99.20 implying a yield of 0.8% compared to a short-term benchmark rate set by the Bank of England at 0.5%.

Australian bills – Although Asian markets had a more favorable tone and the strength of the yen receded, fixed income buyers continued to flock towards the safety of Australian government bonds and in doing so shaved a further two pips off the 10-year yield to 4.79%. Short-dated bill futures were unchanged on the final trading day of the week during which the implicit three-month year-end futures price declined by none basis points to 4.65% compared to the RBA’s 4.50% benchmark rate.

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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