Global bond yields continued to decline at the start of the week with a flattening in the longer end of the U.S. curve and a strong performance across European debt prices most prominent. Investors seem to realize that the Fed’s recent signal means that further bond purchases are a foregone conclusion before year-end in an effort to spur lending by driving bond yields lower. It would be premature at this stage to conclude that the Fed will act in isolation and that further programs around the world could yet appear.
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Eurodollar futures – The U.S. yield curve continues its flattening process as more and more investors conclude that yields are there for the taking at present with absolutely no sign on the horizon that the Fed will alter its policy stance upwards. The 10-30 year spread narrowed a tad to 118 basis points while the December 2012/13 one-year calendar spread dipped to 73 basis points from 77 pips late last week. The December Treasury note future surged more than a half point to 125-24 in an effort to challenge last week’s contract record at 126-02.
European bond markets – December bunds rose 66 ticks to 131.51 pushing yields down seven pips to 2.27%. Only Irish and Portuguese government bond prices are heading higher today as investors await a report detailing the official cost to the Irish government of the bailout of Anglo Irish Bank. Yields on every other European government bond issue are lower as investors get to grips with the fact that despite the sour leftover taste of the financial crisis, the system remains intact. Euribor prices eased at the front end with end of month pressures at the fore. With a large cash drain expected the ECB has the ability to add liquidity through a three-month auction and its regular refinancing activities.
British gilts – After a couple of rough days in which gilt prices were wrecked by counter flows to the bigger trend, British bond prices climbed once again on Monday after estate agency Hometrack Ltd. reported the largest decline in nationwide home prices in 18 months. A 0.4% monthly decline for British home prices is unwelcome for home owners and consumers but whether it will tip the balance at the Bank of England is an unknown. Minutes from the recent policy-setting meeting revealed the view that some members felt the time was drawing closer to when it might be prudent for the Bank to act. December gilt yields eased six basis points to 2.98% with the December futures contract rising 69 ticks to 124.10. The British short end also reflected optimism over the future path of interest rates by rallying, sending implied yields lower by three basis points.
Australian bills – Despite the recent bullish tone to global bonds, risk appetite has stepped up a notch on hopes of what might happen to growth as a result of additional stimulus measures. The Australian economy continues to float along at a healthy pace on account of its trading relationship with China and the rest of Asia. The risk to Aussie rates is that they increase but investors seem to think that six quarter point increments must mean that the light looms large at the end of the tunnel. Thus Aussie government bonds continue to trade better in line with the global trend and Monday was no exception with bond buyers lowering yields by one pip to 5.10%. The advance in Asian equity prices, however, was enough to raise implied yields on 90-day futures, which declined by four pips.
Canadian bills – Canadian debt prices rose, but not enough to match the gain for Treasuries pushing the 10-year government yield spread wider by a single basis point. At the weekend the Canadian Finance Minister Jim Flaherty sounded off cautiously about downside threats to the domestic economy as a result of the economic challenges facing the United States. Canadian 90-day bill prices rose sending implied yields lower by three basis points.
Japanese bonds –There was very little movement in Japanese government bond prices on Monday as investors responded to Friday’s rally on Wall Street by buying those listed in Tokyo. The December future rose five pips to 142.93 with the benchmark 10-year JGB yielding 0.995%. An unnamed government official told Bloomberg news that a new ¥4.6 trillion stimulus package would soon be announced and that it would rely on existing tax
revenues courtesy of an unexpected swelling in taxes paid. Data released on Monday showed an unexpectedly lackluster performance by Japanese exporters. On a year on year basis the volume of exports grew 15.8% and at the slowest pace for some time during August. A measure of prices facing corporate services companied declined by 1.1% at the same time as the deflation trend continued.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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