Bonds supported by dip in U.S. factory orders

The prospect of further quantitative easing ahead is keeping bond prices lofty at the start of the week. The Fed is scheduled to buy bonds in the open market over the next couple of days as it plans to maintain the size of its balance sheet, helping to depress borrowing costs across the economy. A glimmer of risk aversion ahead of the equity market’s official opening also helped underpin bond prices.

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Eurodollar futures – Bond prices have nevertheless ticked lower after a rosy start and ahead of data later this morning expected to show a decline in factory orders throughout August. Traders spent three hours trying to push the December Treasury note future through 126-17 before abandoning their efforts. Earlier the 10-year yield fell to 2.48% while that on the two-year reached a record low at 0.3987%. On Friday New York Fed President Dudley reinforced the market’s belief that further measures to spur the economy would soon be forthcoming. He saw further action as necessary unless “the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.” Eurodollar futures remain higher implying lower yields at the short end of the curve.

European bond markets – There is very little data to buoy European markets this morning. A speculative Financial Times article reckons a larger than currently projected Irish budget deficit, widening on account of an economic slowdown rather than a dip in tax revenues. While that prospect is indeed a negative, investors continue to cling to the view that the European peripheral nations are indeed small and that core Europe has a rescue plan in place. It has to be said that with German and French economic activity back in full swing, the whole notion of further financial strains is a far less appealing story. Yields remain low with the German 10-year at 2.26% this morning as the December bund future rallied 38 ticks to 131.69 this morning.

British gilts – British Chancellor of the Exchequer Osborne is today speaking at the party conference in Birmingham and is likely to deliver words comforting to fiscal conservatives eager to hear resolute plans for reducing the nation’s deficit. Yields are lower across the curve despite a rebound in a PMI construction survey indicating a healthy building sector. The December gilt contract edged higher by 38 ticks to 124.54. Short sterling futures made price gains of three basis points.

Australian bills – Ahead of Tuesday’s RBA meeting, 90-day bill prices traded in Sydney slipped four ticks. The prospect of an interest rate increase is currently 60% according to fixed income prices. As the Reserve Bank officials ponder whether to further cool the domestic activity with a shift to 4.75% tomorrow, they can ponder over the improved health of the European financial system and some stability in the U.S. markets. Meanwhile its biggest customer, China, has also engineered a very delicate maneuver in turning around its economy during the first three quarters of the year. Government bond prices nevertheless accelerated on Monday slicing three basis points off the 10-year yield to 5.04%.

Canadian bills – Canadian bills are a smidgeon higher this morning with most contracts just a tick higher across the curve. The government 10-year bond is trading higher, sending yields down to 2.778% while the futures contract expiring at year end rallied to 126.29 for a 27 tick gain.

Japanese bonds – Government bond yields continued to rise in the hopes that the outcome of Tuesday’s Bank of Japan meeting will lead to further stimulus measures to ease the nation’s slowing economic recovery. Bond yields dipped two basis points to 0.935% as the December JGB future surged 23 ticks to 143.55.

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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