Treasury yields aiming for fresh lows again

Global bond yields are continuing a decline that has driven yields close to recent low water marks. European stocks are lower after a widely-watched report showed a downturn in activity sparking a fresh round of risk aversion. In the U.S., weaker than expected labor market data once again fanned fears over a stagnating economy and one in which the Fed is being forced to buy more bonds in the open market.

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Eurodollar futures – Initial unemployment claims missed the marker today as new claims showed an unexpected jump from a revised 453,000 to 465,000 meaning the two week picture deteriorated by 18,000 in an instant. The data inspired a fresh intraday high for the December treasury note future at 126-005 leaving it within just two ticks of an all-time contract high established one month ago. The rally sparked gains for deferred Eurodollar contracts. The December 2011 contract gained a mere one tick compared to a six tick gain for the December 2012 contract and a seven tick gain for the December 2013 expiry. The 10-year yield fell to 2.505%.

European bond markets – While U.S. yields are testing the lows, German yields are on the decline but nowhere near the panic-status of August. The December bund contract is rallying hard, however, inspired by the American market but also taking on independent strength. The contract has risen 75 ticks to 131.50 with the tailwind of fresh data also playing a part today. PMI survey data showed a slowdown in the pace of Eurozone-wide manufacturing and service data with the composite reading falling from 56.2 in August to 53.8 this month. Readings above 50 for this diffusion index portray expansion while lesser values indicate contraction. The pace of expansion during September therefore slowed. The yield on 10-year government debt fell to 2.286% after the Federal German government ratcheted down by one-third the value of bonds it expects to issue in the final quarter of the year. In a statement it communicated that more recent favorable conditions would reduce its need for debt. Earlier, the government reported a 3.6% rise in tax revenues as the economy grew at its fastest pace in the two decades since the East and West were unified. Euribor futures rallied hard and are ahead by six basis points today.

British gilts – A slowing in mortgage loan approvals as reported by the British Bankers Association was the latest piece of data to suggest economic slowdown. If slowdown is perhaps too harsh a term then at the very least the report indicates lesser confidence among consumers wanting to saddle their balance sheets with more debt in the face of uncertainty for home prices. The December gilt contract surged again rising 33 ticks to 124.36 sending yields down to 2.94%. Short sterling futures also made sharp gains shedding seven basis points in implied yield as the curve once again flattened.

Australian bills – Weaker stock market price action started in Asia overnight, although Japan was closed, and drifted to Europe throughout the morning. The rise in risk aversion helped reduce fears that the RBA would be swift to further tighten monetary policy allowing for a healthy seven basis point decline in deferred 90-day bill yields on the Sydney Futures Exchange.

Canadian bills – Canadian bill futures are modestly higher as implied yields dip by up to two basis points. The 10-year government bond future is 58 basis points higher at 125.91 leaving its yield premium over U.S. treasury notes at 31.5 basis points.

Japanese bonds –Japan is 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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