Aussie bill futures discount end to RBA monetary game

Demand for Japanese bonds has driven a fifth consecutive monthly gain, while U.S. notes have performed the best since the end of 2008 when the economy went belly up. German yields are gouging out fresh lows almost daily as the summer starts to end. Yields have fallen so far that investors should really be considering impending crisis. So today’s revival in a gauge of U.S. consumer confidence suddenly looks misplaced. Despite strong domestic data released overnight, Australian short-end futures moved to discount an end to the monetary tightening process and while the market stands short of predicting that the next move will be lower. But that’s the direction traders are pushing the market today.

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Eurodollar futures – Investors were braced for further slippage in the Conference Board’s August reading of consumer confidence to 50.7 in the event July data was revised higher. But, a higher than expected reading of 53.4 stumped bearish analysts. Ongoing weakness in housing market data and a loose labor market are not having the same distressing impact on consumer confidence as they might once have had it seems. Meanwhile the ISM’s Chicago PMI for August did come in short of forecast with a reading of 56.7 after 62.3 in July. Readings above 50 indicate expansion. Also out today was the Case-Shiller home price index of 20 metropolitan areas, which rose 4.3% in June.

An earlier slide in yields has been tempered by the unexpectedly buoyant reading of confidence with the September treasury note futures contract recoiling from an intraday peak at 126-21 to 126-11 carrying a yield of 2.498%. Back month Eurodollar futures remain bid and are trading with implied yields five basis points lower than as of Monday’s close.

European bond markets – German unemployment fell once more almost in line with expectations as 17,000 workers found new jobs. The unemployment rate remained static at 7.6% and compares to a Eurozone-wide rate of 10%. September bunds have had a huge rally during August with today’s 2.104% yield at the 10-year a huge 56 basis points lower than at the end of July. European fixed income appears more prepared to dance to the dour tune of American fiddlers than join in with the healthier-sounding German chorus.

Canadian bills – Weaker than expected second quarter GDP growth helped bolster demand for 90-day bill contracts, which saw implied yields fall once again by a further five basis points. The yield on the 10-year government bond remained stranded at 2.772%. However, with the September futures contract trading at an unchanged 127.29, GDP for the three months ending in June came in short of forecast at 2% while the blistering pace of first quarter growth was revised lower from 6.1% to 5.8%.

Japanese bonds – Weakness in Japanese stock prices and yen buying undeterred by official comments that the government was prepared to make a “bold” response, helped drive down yields again to see out August leaving 10-year bonds higher for a fifth-straight month. Yields declined by five basis points to 0.96%, while the intraday rally was curbed by positive data showing that industrial production for July grew by 0.3% between months leaving the series 14.8% higher than a year ago. Retail trade for that month also rose 0.7% leaving it 3.9% higher over a year ago.

British gilts – Gilt prices remained spooked by the sensation that the global economy is facing a slowdown. The September contract remains elevated and towards its highest in a week at 126.77 carrying a yield of 2.816%. The nine basis point decline is oversized on account of London’s trading holiday on Monday. Short sterling futures are also higher as implied yields continue to cave with the strip better bid by three basis points.

Australian bills – Australian data released overnight was actually pretty optimistic, with July retail sales especially strong. Likewise, building approvals also expanded by more than was expected making a dip in Aussie bond yields counterintuitive. However, the rising tide of risk aversion helped government bond yields slide by three basis points to 4.729%. The growing optimism that the central bank may have to curtail its monetary tightening also boosted back-month 90-day bill futures sending implied yields as much as 15 basis points lower. The June 2011 contract jumped to 95.44 implying a yield in a little under a year of 4.56% compared to the benchmark RBA rate of 4.50%. The last time it traded that low was in March 2009, shortly after global stock markets reached rock-bottom.

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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