European bonds rebound

Fixed income trading is muted with an earlier sell off in European markets reversing as major contracts headed back to around breakeven on the day. Tuesday’s FOMC meeting is the highlight of what otherwise looks like an innocuous week.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis.

Eurodollar futures – U.S. fixed income markets are off to a slow start with the December 10-year note future trading in a nine-tick range. In early morning trading the contract is pushing higher at 124-10 and is leading the charge to make way for narrow gains for Eurodollar futures contracts, which are flat to marginally up with little available data to change the picture. The 10-year yield slipped by a single pip to 2.72% as investors try to anticipate what the FOMC might do or say at Tuesday’s meeting. The Fed will undoubtedly stress the ongoing need to keep interest rates low. It will likely affirm a need to maintain an even keel in terms of its balance sheet by reinvesting any maturing bonds purchased last year. It may indeed reduce its GDP forecast for next year after an uncertain summer.

European bond markets – German bunds prices have rebounded sharply from a decline to 129.31 this morning and last traded at 129.77 or unchanged on the day with a yield of 2.43%. The earlier in the month tone leading the charge of bond bulls has come to an abrupt halt given the lack of supportive bad news. Euribor prices dipped by a pip on the session.

British gilts – The central bank’s quarterly economic bulletin highlighted the challenges facing an economy where the financial system came close to breaking. Its efforts to pass interest rate reductions on to consumers largely failed according to analysis within today’s report as banks used the opportunity to hoard cash and widen margins probably to replenish capital. Elsewhere the bank reported that mortgage loan approvals fell to £45 billion last month and so reaching a 17-month low. In conjunction with an estate agent’s report indicating a 1.1% decline in asking prices for homes in England and Wales last month the latest housing market data is bearish for the British economy. Short sterling futures nevertheless had little to latch on to in order to build a rally causing short end futures to decline. An earlier decline in December expiration gilt futures to as low as 122.21 appears to have given way to renewed strength in the prospects for the contract, which last traded at 122.45 – almost unchanged on the day.

Australian bills – Short-term bill prices took a slamming overnight. Governor Stevens served up a warning that the economy may yet still need further toughness from interest rate policy if activity in the natural resources sector turns in to an inflation-priming mining boom. The yield curve steepened with deferred futures contracts falling harder than nearby expirations, yet the entire curve shifted upwards to imply firmer yields. The December expiration has now seen its implied yield surge by 50 basis points in under three weeks. In the same period, the one-year December calendar spread has widened out form five basis points to 25 basis points adequately exemplifying the heightened chance of further monetary tightening. The 10-year government bond yield jumped by five basis points to stand at 5.14%.

Canadian bills – Data released this morning showed that wholesale sales slipped by less in July than they did in June. Still the number was the wrong side of positive, although that’s not very evident in bill trading where yields are fractionally higher in December and March contracts while unchanged along the rest of the strip. The yield on the 10-year government bond future rose by one basis point to 2.94% as the contract slipped by 13 pips to 124.42.

Japanese bonds –Markets are closed for a national holiday.

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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