Yields fluctuate as markets pause

European bond prices are lower as investors digest new issuance from France and Spain while yields in North America are softening a tad despite a reasonable initial claims report on Thursday.

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Japanese bonds –The December bond future managed to edge forward by 13 ticks to 142.25 despite cash 10-year JGBs adding one basis point to yield 1.035% at the end of the trading day. Yields earlier slipped to a two-week low as dealers predicted that yen washing up in the balance sheets at financial institutions as a result of midweek currency intervention would be left unsterilized. Investors would then be faced with the alternative of buying either stocks or bonds as a final destinations for excess liquidity.

Eurodollar futures – A slight dip in a reading of initial claims for unemployment insurance failed to turn bond prices lower and the yield on the 10-year has actually dipped to 2.712%. Eurodollar futures rose after a report showed tame producer price increases throughout August. However, implied yields have begun to rise in sympathy with cash rates in Europe as dealers eye the end of the third quarter and consider the potential for funding pressures. The December 10-year note future is trading marginally higher at 124-07.

European bond markets – German bunds yields jumped by five basis points to 2.451% as investors sold debt to make way for fresh euro-denominated issuance from France and Spain. The December contract earlier reached its lowest in five weeks reaching 129.34. The implied yield on Euribor futures climbed as the hunt for month end cash deposits begins and dealers forecast that an available pool of liquidity is likely to continue shrinking as fixed-term deposits mature at the central bank.

British gilts – Gilt prices edged towards the low of the day’s range and are down 43 ticks at 122.55. A disappointing reading of August retail sales and a downwards revision to July data has investors on edge about a further slowing for the British economy. However, that doesn’t mesh with today’s bearish price action for interest rates. Short dated sterling futures should be rallying on the pessimism but are clearly falling in sympathy with Euribor contracts on liquidity concerns. Short sterling futures possibly also fell in response to a quarterly consumer inflation expectations report from the Bank of England. The survey questions consumers over their expectations about prices over the coming 12 months and a reading of 3.4% is a negative development after a May reading of 3.3%.

Australian bills – Aussie government bond yields slipped two basis points to 5.065% despite a positive review of an economy heading for full employment according to RBA Assistant Governor Philip Lowe. Consumer inflation expectations for September rose from 2.8% to 3.1% in a report released earlier in the day although the series of monetary policy increases means that most investors didn’t panic with 90-day bill prices remaining static.

Canadian bills – Government bond yields slipped just a basis point, maintaining a 24-basis point premium over comparable U.S. treasuries. The Canadian curve has flattened significantly recently following the quarter point interest rate increase to 1% by the Bank of Canada. Bills of acceptance futures fell just a couple of basis points and marginally less dramatically than did Eurodollar futures.

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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