Short term interest rate futures prices are in the green today accompanied by gains for global bonds. The exception is Australia where minutes from a recent meeting at the Reserve Bank dropped a bombshell that more monetary measures would be appropriate if growth turns out as planned. With risk back on the table, the performance of bond markets remains uncomfortable given the summer slide in yields. Perhaps getting used to low yields is part of the problem.
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Eurodollar futures – Eurodollar futures prices are up four basis points at the back of the curve and half that amount at the front. December Treasury note futures accelerated to 124-26, a two-week peak, and shaving three basis points off the yield to 2.674%. The acceleration of bond prices ahead of this afternoon’s FOMC statement may simply be short-covering or it could be positioning ahead of a possible announcement that the Fed will extend open market purchases of mortgage and government debt in an effort to further depress yields. Data earlier showed that housing starts in August were far stronger than expected rising to an annualized 598,000 improving on a July reading of 541,000.
European bond markets – Successful auctions by Spain and Ireland removed earlier pressure on European bond prices as investors snapped up everything on offer. The Irish government auctioned €1.5 billion while Madrid issued €7 billion in debt. In trading on Monday, yields on both nation’s debt fell causing a rise in borrowing costs ahead of today’s auctions. German bunds prices now appear to have created a decent floor above 129.25 where selling pressure ran out of steam for a third occasion. Buyers took control lifting the December contract to 129.83 at the current session high sending yields two basis points lower at 2.449%. Euribor futures contracts are two basis points higher sending implied yields lower.
British gilts – The December gilt put in a strong performance on Tuesday with the contract rising 40 ticks to 122.62 to yield 3.118%. The worst set of public borrowing numbers for the month of August in 17-years of record-keeping suggests that the economy might be generating insufficient tax amounts possibly through slow growth. Analysts expect the government to specify job losses for the public sector in October and on current fiscal footings there is a hint in today’s number that the cuts may need to be deeper. The rally in fixed income is thereby orchestrated by those possibly expecting the Bank of England to resume the bond purchase program that concluded six months ago having feasted on £200 billion of government and corporate bonds. Short sterling futures rose by three basis points along the strip.
Australian bills – Ninety-day bill prices responded to a tough message apparent in the release of minutes from the September policy meeting. The Reserve Bank warned that should the economy continue to grow in line with its central forecast, it would very likely have to tighten the monetary purse strings again. Bill futures shed close to 10 basis points and look poised for further declines in coming sessions if there is another shred of evidence supporting the view that perhaps the economy is growing at an above trend pace. That shred of evidence could be found in rising risk appetite outside of the country. The RBA stopped short of raising interest rates at the September meeting on account of worries over the health of the U.S. economy along with residual fears that European banks and governments might struggle to reshape in the event that a second shoe dropped.
Canadian bills – Bill prices made only minor gains in light of fresh evidence that consumer prices are under control. The Bank of Canada CPI core rate rose 0.1% in August having declined by the same amount in July. The year-on-year change of 1.6% was the same as in July. The data softens the prospect for a further interest rate increase this year although dealers, once bitten, remain shy of eliminating the potential. At a price of 98.60 the December contract implies a 90-day cash rate at year end of 1.40% and well above the current 1.00% cash rate.
Japanese bonds –JGB futures added 29 ticks in the year-end contract to close at 142.41 where the yield on the 10-year bond stands at 1.04%. The gains came on speculation that last week’s intervention to sell the yen will either not be successful or that the economy will still require further steps from the government to stimulate the economy.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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