Bonds ease after firm producer price gauge

The gloves are off in Europe after ECB President Trichet launched a sting rebuke to council-member Weber’s recent comments regarding the early exit from the central bank’s bond-buying program. Core European bond prices are lower and contrast gains on the other side of the Atlantic following a report showing the first drop in factory output since the official end to the recession in June 2009.

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European bond markets – In an interview with Italian newspaper La Stampa Jean Claude Trichet sent a strongly-worded message to his German colleague, Axel Weber. Last week Mr. Weber warned over the dangers of not recognizing when the ECB should exit its bond purchase program introduced earlier in the year offering a lifeline to European governments and banks. Today Mr. Trichet fired back telling the journal that he was the sole voice of the council noting that Mr. Weber’s view was not the position of the governing council “with an overwhelming majority.” Core German bunds traded lower with the December futures contract slipping 18 ticks to 130.54 yielding 2.388%. Peripheral nation’s debt traded better as investors warmed to the prospect of approval of Portugal’s budget including tax increases and spending cuts.

Eurodollar futures – The interest rate market took a shot in the arm on Monday morning following the first drop in industrial production in 15-months when the recession is officially thought to have ended. During September, industrial production dipped by 0.2% following a gain of the same magnitude in August. Capacity utilization also declined by a similar magnitude to 74.7% and indicating resources were marginally less utilized during the late summer. Eurodollar futures are lower at nearby maturities, while contracts at further maturities jumped by as much as 10 pips in line with gains for the December 10-year note future, where the yield slumped to 2.524%.

British gilts – Short sterling futures are trading either side of unchanged in an uneventful market ahead of the details of the Comprehensive Spending Review midweek by Chancellor Osborne. In it he will detail the impact of an across the board 25% cut in ministerial budgets as announced mid-year. December gilts are lower in line with German bunds trading at 124.45 where the yield stands three basis points higher at 2.976%.

Australian bills – Little change in Aussie bill prices where there was little by way of regional stock market action or domestic data to generate a market bias. Dealers are blissfully aware that the Reserve Bank might be close to ending its monetary tightening process with the final decision at the mercy of global rather than domestic growth trends. Government bonds fell marginally sending the yield higher by a pip to 5.128%.

Canadian bills – The Bank of Canada meets on Tuesday to decide on monetary policy. The 9% odds of a further quarter-point tightening in policy overwhelmingly show that dealers recognize the challenge facing the central bank. Having lifted policy three times this season, Governor Carney is well aware of the restraints on his action from a slow-to-recover U.S. economy. Yields on 90-day bills dipped by six basis points today while a rally in the 10-year Canadian government bond saw its yield slip by two pips to 2.766%.

Japanese bonds – Government bond prices remained unchanged to yield 0.865% as investors determined bonds remained in favor with yields near a seven-year low. Department store data for September indicated a slower pace of spending although the impact was less in capital city Tokyo where activity fell by 3.8% year-over-year.

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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