Investors are warming to the idea that growth will increase as a result of further efforts by the Federal Reserve to spur lending when it convenes next week. The impact on investors is that as they review the current health of the domestic economy, they now see the glass half full rather than half empty. Additional measures to spur growth are set to bring forward a conclusion to lax monetary policy at a time when third quarter GDP data is likely to show a mild acceleration to a 2% pace. Yields around the world are rising to at least the highest in a month as the bond bears pop a global bond bubble.
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Eurodollar futures – Deferred Eurodollar contracts dropped in price sending implied yields firmer by around five basis points. With a firmer than expected reading for durable goods orders bearing down on treasury futures facing a sixth consecutive daily drop, yields continued to rise midweek. The 10-year yield added six basis points to stand at 2.70% making this the highest in a month. New York Fed President William Dudley noted in a speech on Tuesday that although economic activity had picked up following earlier measures to stimulate the economy, growth was not robust. He reiterated his view that the Fed should take further action to deal with too high a rate of unemployment and too low an inflation rate.
European bond markets – European bonds also tumbled as the fallout from rising U.S. yields spilled over. German bunds have been running on thin air for some time given the improvement in Eurozone activity. But investors felt little choice than to chase falling yields on the far side of the Atlantic lower. Today the December bund future is lower by 66 ticks at 128.70 where the yield has surged by eight basis points towards its highest in almost three months at 2.59%. Euribor futures are close to session lows but nursing mild losses of just three basis points at far-dated maturities.
British gilts –British government debt prices slumped with the December future reaching a one-month low at 122.51 sending the yield higher by eight basis points. The move contrasts with the recent optimism bounding around the gilt market on hopes of a done-deal at the Bank of England in the form of a second round of quantitative easing. However, the third quarter pace of growth was so firm that dealers are left scratching their heads over whether or not the need to add more economic stimulus remains as clearly defined. The gilt market cannot buck the broader tendency lower in global bond prices.
Australian bills – The shoe was on the other foot down under following an improvement in the pace of inflationary pressures. Third quarter inflation unexpectedly came in below expectations of a worsening in the series and as such pulled the rug from any ambitions the central bank might have had in moving away from a five-month halt in raising interest rates. The yield on the 10-year government bond slipped by two basis points to stand at 5.207%, while 90-day bills prices jumped around 10-basis points as the chance of an interest rate increase slumped from 47% to 15% at next week’s meeting.
Canadian bills – The slide in bond prices failed to escape the Canadian market despite a subsiding local dollar. Central bank Governor Mark Carney yesterday told Parliament that currency intervention was a wide-open option as a policy tool as that market faced “heightened tension.” A weaker currency ultimately stimulates growth but in this case the reversion from parity probably lessens the hindrance to growth. December government bond futures slipped 29 ticks to 125.83, while bill prices actually added a couple of ticks given the weakening need to cap either inflation or growth at present.
Japanese bonds – A slide in the yen overnight and the ongoing rise in U.S. yields was seen to remove some of the pressure on the Bank of Japan to further ease its monetary policy. Bond futures expiring in December slid 27 ticks to 143.15 sending its yield four basis points higher at 0.935%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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