Interest rates in holding pattern before Beige Book

Bond prices around the world are generally lower as risk appetite recovers following a slide in Tuesday’s session. Dealers are braced for further signs of economic weakness in this afternoon’s regional survey of the Fed’s 12 districts in the Beige Book report, but rather than spurring declines in bond prices, dealers today appear to be on the defensive and are taking profits on recent purchases during a drive to record lows for some maturities.

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European bond markets – The cost of borrowing to governments around Europe rose again on Wednesday led by declines in German government bund prices. The December bund future slipped 19 ticks to trade at 130.04 where the yield rose to 2.438%. ECB governing council member Juergen Stark grizzled when he told an audience of the dangers of maintaining excessively loose monetary policy and claimed that by doing so, some governments might feel less pressure to reform clearly lax fiscal policy.

Eurodollar futures – Interest rate traders appear to be on the same page following the recent surge in bond prices. Another round of easing is in the works and its details remain confidential at the Fed’s printing press. Consensus appears to be somewhere between a dollar value of $500 billion to a full trillion dollar package to be enacted over a six month period. The emergence of a core view has allowed investors to come to terms with the state of the economy and proposed remedy and rather than blindly buying bonds out of fear the market appears to have discovered the appropriate price. December treasury notes are now lower by 10-ticks at 126-23 where the yield stands at 2.51%. Eurodollar futures are now lower by around four basis points despite another weak reading for weekly mortgage applications, which declined by 10.5% through last weekend.

British gilts – A three-way split in the October vote at the MPC in London still leaves investors in little doubt that the Bank of England is on the cusp of taking further steps to ease monetary policy. While inflation remains stubbornly high, there are special factors working their way through the data that mean the backdrop is non-threatening. Today Governor King told reporters that several measures of price pressures used by Bank staffers remain remarkably stable. Conscious that inflation expectations could accelerate, the Governor is equally aware that the substantial amount of slack in the British economy at a time when tougher fiscal is being rolled into action could easily lead to an undesirable undershoot in actual inflation. Faced with that possibility, the Committee determined that more monetary stimulus is necessary but judged at the meeting that the balance of risks had not shifted materially so as to warrant an immediate revitalization of the bond buying process. The December gilt contract is flat on the session at 124.08 and implies a yield of 2.995%. Short sterling futures are trading slightly higher on the increased likelihood of more monetary easing.

Australian bills – Anticipating a future interest rate increase from the Reserve Bank may have prompted buying of the Aussie dollar after its sharp decline on Tuesday, but the fact that China was quick to announce the same feat actually reduces the prospect of action in Australia. Consequently Aussie bill prices actually rallied today as dealers reassessed the likely timing of another rate move from the RBA. The yields on the 10-year government bond added one basis point, however, to stand at 5.122%.

Canadian bills – Policy makers yesterday appeared to take a softer stance on the outlook for Canadian growth and indicated that future decisions would need careful consideration. The Bank of Canada left monetary policy alone while the dovish tone sparked a wave of bond buying. Today, however, bond prices are lower in line with the dip in treasury prices. The December CGB future is trading at 127.08 with a loss of 27 ticks yielding 2.722% with a spread of 21 basis points over comparable U.S. treasuries narrowing after the central bank meeting. Earlier today a favorable report on wholesale sales depicted a better state of health for the domestic economy after August sales outstripped predictions to grow at a monthly pace of 1.2%.

Japanese bonds – Japanese government bond futures remain near the lowest level in two weeks, although a 10-year yield of 0.885% remains near a seven-year low. 20-year bonds toppled ahead of a sizeable auction on Thursday while yesterday the government noted that the economic recovery appeared to have paused making this the first time since February 2009 they downgraded the monthly outlook.

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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