Japanese intervention nudges global yields higher

Fixed income prices are generally lower around the world as yields nudged higher following a unilateral round of currency intervention in Japan where the authorities finally smacked the yen back down. The move boosted the value of the yen and encouraged a modest amount of risk appetite buying. The flipside to the same coin is the lesser perceived need for the safety offered by government bonds, creating a minor edge up in yields.

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Japanese bonds –The exception to the rising yield rule was in Japan itself, where buyers flocked to bonds, sending the 10-year yield sliding sharply lower by nine basis points at 1.03%. There were other reasons behind the binge-buying. Moody’s Investor Services affirmed the Aa2 rating on Japanese government debt stating that Prime Minister Kan’s action in the currency market was supportive of a broader stimulus policy. Investors continued to buy bonds in response to Kan’s defeat of Ozawa yesterday in a party poll. The Prime Minister’s policy is less likely to pursue further debt issue than under Ozawa’s plans.

Eurodollar futures – Eurodollar futures are slightly higher after earlier fixed income losses. The 10-year yield is now unchanged at 2.68% after a couple of data points that leave investors little wiser. August import prices rose at twice the forecast pace and included a backdated revision higher to last month’s number. However, there is little perceived inflationary threat in the bigger picture and between input and output prices a lot can happen. The Empire State manufacturing index dipped slightly but new orders and shipments continued to indicate stability. The drag on the overall reading today came more worryingly from forward activity expectations. Finally, factory output rose in-line with expectations. Earlier in the morning, the MBA weekly reading of mortgage applications dipped 8.9% on the prior week confirming that it takes more than ultra-low interest rates to spur activity across housing in terms of mortgage demand or refinancing activity.

European bond markets – German bunds remain close to the daily low at 129.93 as the perceived need for safety among investors dissipates. The December contract currently trades at 130.13 carrying a yield three basis points higher than Tuesday at 2.394%. Earlier in the session, Eurozone wide consumer prices for August showed little change with a monthly 0.2% increase to give an annual pace of change of 1.6%. Euribor futures reflect the approval of risk appetite today and are three basis points lower implying slightly firmer yields for short-dated cash.

British gilts – Gilt prices fell as riskier ventures suddenly looked more appealing today. The December futures contract surrendered 31 ticks to 122.91 where the 10-year yield added four basis points to 3.089%. The rise in yields today bucked data released showing an unexpected jump in jobless claims and the first in seven months. Next month the government will announce precisely how spending cuts, as part of its budget austerity measures, will affect public sector workers. Its watchdog has predicted job losses of around 500,000 over the next five years on account of those stringent measures. The recent dip in yields in Britain matched those around the world but came at a time when investors are running scared over a potential slowing for growth as budget measures bite. Short sterling interest rate futures also gave up three basis points today as yields edged higher.

Australian bills – As it turns out, one of the best proprietary positions ahead of Japanese intervention might have been to get short of Aussie government bonds and go long Japan. Today the slide in Japanese yields contrasted to an eight basis point surge on Australian debt. By the close of business the Aussie dollar had jumped against the yen and remained close to a two-year high against the dollar on growing recent expectations that the Asian economies were starting to fire on all cylinders. Bonds maturing in 2020 yielded 5.08% by the close. The spread between Japan and Australia widened by 17 pips to 405 basis points overnight.

Canadian bills – Despite weaker than projected manufacturing sales data for July announced earlier today, Canadian bill and bond prices are lower as risk appetite warms. Government bonds fell marginally sending yields higher by two basis points to 2.965%. Shorter-dated bills of acceptance also shed three or four basis points as the curve edged higher.

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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