December T-notes see new highs

Core European bonds are higher once again, while those of wayward peripheral nations continue to move in the opposite direction. European central banks apparently stepped in to purchase debt issued by the Irish this morning through the open market from dealers following a rise to a seven-year high for yields.

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Eurodollar futures – Today the Fed is likely to auction some $35 billion in five year notes at a record low yield as investors plow into fixed income securities along the yield curve. Trading got off to a poor start as investors woke up feeling a little more risk averse than yesterday, selling equities and abandoning purportedly riskier currency bets in favor of bonds. The expectation that the Fed will enter the securities market during the third quarter is certainly maintaining a bid for government paper while at the same time prolongs the question of when the Fed might ever tighten monetary policy. The horizon remained just as foggy following a house price index from S&P Case-Shiller showing a lighter than hoped for gain in real estate values across 20 major metropolitan areas. Only a more ebullient reading might have thrown up a red flag suggesting the Fed need not pump in more stimulus. Price gains for Eurodollar futures accelerated at further maturities with implied yields plunging seven basis points from December 2013 expirations outwards. Meanwhile the curve continues to flatten with the 30-year bond yield outpacing gains at the 10-year maturity. The December 10-year note belted well past the recent contract high reaching 126-12+.

European bond markets – In yield terms, Germany is up and Portugal is down. Same pattern for Ireland, which is why European central banks stepped in to buy its debt keeping good promises made at the height of the systemic meltdown ahead of the summer. Comments made earlier by ECB member Stark indicated he saw turning signs for the Eurozone following a healthy jump in its money supply. Dealers seem to be focused on when the Europeans might start raising rates as if this would signal an obvious end game to the present turmoil.

British gilts – With a pound likely to rally rather than fall when risk appetite picks up, gilts too make gains when core bonds rise. Both the December gilt futures contract and short sterling have made healthy gains with the yield on the 10-year government bond dropping by five basis points to 2.912%. Implied yields dipped just a little less across the strip as the curve flattened further.

Australian bills – All it took was a slide in Asian stock markets overnight to set a bullish bond market tone for Australian government issues. The 10-year yield dumped five basis points to 5.043% while 90-day bill prices gained around four basis points.

Canadian bills – Canadian debt prices surged pretty much in line with treasuries and the December contract currently shows a gain of 48 ticks to 126.40 where the yield has dropped by three basis points to 2.767%.

Japanese bonds – Japanese government bond prices rallied once more ahead of a midweek tankan survey from the central bank. Investors are growing anxious that building business confidence in the domestic recovery is being hampered by deteriorating external events. Nikkei news reported that the Bank of Japan might unveil fresh measures at next week’s policy meeting to further revive the economy. The 10-year yield fell to its lowest throughout September at 0.95% while the December future added 26 ticks to 143.09.

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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