Yields shy away from earlier losses

Ten-year treasury yields increased to the highest in five weeks as the view that the North American economy – the world’s largest – is likely to face a second round of weakness took a further step back. Risk appetite seems once again to be back on the table after a round of Chinese data suggested that the domestic economy is recovering from a slowdown engineered by its own authorities to prevent a stimulus-induced recovery snowball out of control.

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Eurodollar futures – U.S. 10-year yields reached 2.845% this morning as S&P equity index futures jumped in response to strong industrial output growth and healthy retail sales data in China. The spread between two and 10-year yields widened to the most in a month at 225 basis points and ahead of a U.S. retail sales report later in the week likely to show a second monthly advance for domestic spending. The December note future has nevertheless rebounded from its intraday low to slightly higher on the session at 123-14 where it yields 2.802%. Eurodollar futures remain in the black by a pip.

Japanese bonds –The pattern was the same in Japan overnight and the session ended with a minor dip in the 10-year government bond yield at 1.135%. The December future eased just two ticks to close at 141.21. The tone to bond trading was negative on account of a rally for regional equity indices following the constructive data set from China. Tuesday is the showdown day between Prime Minister Kan and contender Ozawa for control over the ruling DPJ party. Bonds traded on the back foot in the event that Mr. Ozawa might topple the party chief, deploying a wave of spending to help boost the domestic economy.

European bond markets – December bunds reached 129.53 before the contract could make a recovery to 130.00. Last Monday’s sensational WSJ article undermining the stringency of the European stress tests is merely a memory today. For several days last week the future of the banking system in the region was in doubt in investors’ minds. Yet weekend news that a Basel III accord has been struck has rejuvenated the system and all is once again well. The bank’s boost to capital requirements is a tough pill to swallow but is served with the sweetener that the timeline stretched out eight years hence.

Australian bills – Aussie government bond yields took a three-pip rise squarely on the chin. The rise in borrowing costs represents the antithesis of gathering momentum in the Chinese economy – its biggest trading partner. Industrial production rose 13.9% across China during August, which Australian exporters will be glad to hear. Short-dated bills tumbled in price sending implied yields higher by around six basis points.

Canadian bills –Canadian bill prices are flat on extremely light volume this morning. The easy-come, easy-go attitude to U.S. trading leaving yields marginally easier has Canadian fixed income trading on low-level alert this morning.

British gilts – British government bonds rebounded sharply as U.S. markets recovered. The December gilt future slid to a nasty 56-tick intraday loss to a low at 121.93 before rebounding to 122.52 where the yield stands at 3.13%. Short sterling prices are higher at the front and lower by a marginal amount at the back months representing a mildly steeper curve.

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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