Dealers buy bonds after digesting central bank views

Friday’s initial response to the words from Ben Bernanke is being reversed on Monday. Bond yields jumped sharply as the Fed Chairman said that the FOMC stood ready to perform whatever action necessary to safeguard the economy from failing. Investors immediately looked beyond the action of further quantitative easing and took this as a sign that ultimate economic recovery would be bearish for bonds.

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Eurodollar futures – Short-end Eurodollar futures are making gains again on Monday with the rise in deferred maturities almost at a double-digit pace. September treasury note futures have climbed by a half-point this morning to stand at 125-23 to yield 2.59%. The initial response to the speech at Jackson Hole in Wyoming was a fear that meaningful measures to support the U.S. economy would revive growth sufficiently so as to put the era of extremely low interest rates at risk. But as dealers ponder further this morning, the renewed buying suggests that they recognize that although the Fed is prepared to act, it can’t go the distance without a confluence of other resources pulling in the same direction at once.

European bond markets – September bunds have recovered from Friday’s slump to 133.25 as weaker longs were knocked out of the market. The contract has climbed once again on Monday to 134.19 where the yield of 2.13 stands seven basis points below that at Friday’s close and compares to last Monday’s record low of 2.09%. The demand for German bunds remained firm despite the headwind of relatively bullish economic data. A European Commission report showed a rise to a two-year peak in confidence in the economic outlook. An unsourced report running in today’s Financial Times says that the ECB will extend its emergency aid to the region’s banking system through 2011. Euribor futures made minor gains on the story.

Canadian bills – The spread between Canadian and U.S. government yields continued to narrow as investors bought into debt issued by Ottawa. The premium demanded by investors to hold Canadian debt widened last week to around 30 basis points over comparable treasuries. Today a rally of 70 ticks in the September Canadian government bond future to 127.14 pushed yields in five basis points to 2.815%. Bill futures also rose by around six basis points reversing losses late last week for the contracts.

Japanese bonds – Bond prices went into reverse in Tokyo following the conclusion of the Jackson Hole symposium with the September contract reaching 141.60 at one point. The contract jumped sharply following the actions of the Bank of Japan, which extended its stimulus lending program from ¥20 to ¥30 trillion yen. The 10-year yield pared much of the intraday loss with yields closing the day three basis points higher at 1.015%.

British gilts – British markets are closed for a bank holiday.

Australian bills – Aussie bonds fell sharply making up for missing the live coverage on Friday in North America. The 10-year yield surged 10 basis points to 4.77%. Part of the jump reflects disappointment in the Japanese response to a rising yen. The yen continued to rally following the BOJ’s loan expansion program as investors fear it won’t be enough to stymie a slowing global economy. The 90-day bill strip rose by three basis points as shorter-dated money yields softened.

Andrew Wilkinson is a Senior Market Analyst for 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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