Bonds ease after firmer producer price gauge

Bond prices drifted lower on Thursday building on a rise in yields on the week. Dealers continue to mull the likely magnitude of what the Federal Reserve will announce either in the days ahead of or at the time of the next meeting. Some market participants observe that the recent slump in bond yields following the FOMC’s September 21 warning has largely discounted the impact of what the Fed might announce. Today’s U.S. data was mixed but to a small degree pulled one leg of the stool away from the Fed’s argument of price weakness.

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Japanese bonds – Government bond yields were unchanged overnight at 0.87% while the December JGB future lost just six ticks to close at 143.85. Local stocks rose despite the yen surging to a 15-year high against the dollar. The circle of a rising yen and spiraling equity prices has now been broken by the promise and implication of further monetary policy easing by the Bank of Japan.

Eurodollar futures – Producer price data for September released on Thursday was marginally firmer than expected and caused a slip in Treasury note futures. The December contract slipped to 126-28 and currently yields 2.434%. The Fed recently cited weakness across various inflation measures as a reason to further spur economic activity. Since that point bond yields have lumped in expectation that the Fed will soon announce how it intends to wade in and buy mortgage and government securities in order to further depress yields. Jobless claims data also released was slightly disappointing. An upward revision to last week’s reading was compounded by a rise of 13,000 claimants to an overall count of 462,000. However, the number of continuing claims slipped to a two-year low although the numbers may well be skewed by people dropping out of the safety net. All in all it remains a challenge to claim that the overall labor market situation is improving at anything other than a snail’s pace. Eurodollar futures saw accelerating losses at further dated maturities.

European bond markets – December bund prices remain lower on the session taking a cue from U.S. paper and guided higher in yield by strengthening equity prices around the world. The contract is 13-ticks lower at 131.44 where the yield stands at 2.28%. Peripheral government bond prices performed well as risk aversion abated. Italy issued bonds while the Spanish central bank reported less reliance from its banking system on its liquidity provision.

British gilts – December gilts are bucking the lower path carved by leading bond markets. The contract is higher by eight ticks at 125.29 notching two pips off the yield of the 10-year government bond to 2.854%. Policy making officials have lots to talk about with Adam Posen telling a German newspaper that governments around the world ought to be cautious in trying to reduce budget shortfalls at a time when more and not less monetary stimulus is required. On the other hand Andrew Sentance continues to argue that the central bank runs the risk of losing credibility by not yielding his call to lift monetary policy at this stage. Inflation has exceeded target for seven months in a row now. Short sterling futures drifted a tick lower in light trading.

Australian bills – Even though risk appetite resumed lifting Asian equity prices and sparking a jump in the Australian dollar, dealers remain relatively content that the Reserve Bank is about to counter with a further round of monetary tightening this year. Bond prices marked time and the yield remained static at 5.045% today while bill prices for shorter dated cash actually rose despite a report indicating a worsening of consumer price expectations. The central bank targets a band of 2-3% for inflation while today’s Melbourne Institute report indicated that consumers expect that reading to be around 3.8% ahead.

Canadian bills – Canadian bill futures tumbled four basis points across the strip in sympathy with Eurodollars as risk appetite remained firm. Government bond yields jumped two pips to stand at 2.743% as the December futures contract dropped 41 ticks to 126.81.

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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