Fed survey sparks treasury rally

A seven-day slide in bond prices that lifted the yield on the 10-year treasury note to 2.73% came to a halt on Thursday after a Federal Reserve request for input on the impact of its forward-looking policy left dealers expecting a sizeable amount of bond purchases. Japanese yields also dropped like a stone after the Bank of Japan left policy unchanged at its regular meeting only to say it would bring forward its next meeting to accommodate the Fed’s actions.

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Eurodollar futures – The yield on the 10-year note dropped to 2.694% despite a sharp drop in initial jobless claims through last weekend indicating an improving labor market. Jobless claims dropped by 21,000 to 434,000 dragging the more reliable four-week moving average to its lowest in three months at 454,000. Continuing claims fell to a two-year low as the count declined by 122,000. This measure does not include those claiming extended and emerging benefits. The December Treasury future has made gains of around 12-ticks to trade at 125-18 while Eurodollar contracts rose sending implied yields lower by seven basis points. The Federal Reserve spurred optimism over a wider easing at next week’s committee meeting by asking its primary dealers to respond to a series of questions surrounding the market response to its actions.

European bond markets – A series of rising confidence measures across the Eurozone spurred initial losses for most European bonds. Irish and Portuguese government bond prices were hit especially high sending the yield premium back out towards record highs. However, dealers reported that the ECB stepped in to buy Irish debt and the action appears to have completely reversed the intraday loss. German bund prices have just moved back into positive territory on a day when the range is rather narrow. The December contract is trading at 128.85. An earlier confidence reading across the Eurozone rose to an 11-month high at 104.1 during September boosting the view that the recovery has gained further traction ahead of fiscal retrenchment heading into 2011.

British gilts –British gilt futures expiring in December are sitting in the middle of a 64-tick intraday range at 122.67 to yield 3.156%. The yield has risen sharply following a report last week showing an acceleration in growth across the nation leaving the central bank with a tough call on whether to ease policy further when it meets next week. A CBI distributive trades survey declined by no more than was forecast although it marked the first month in five that retailers were less optimistic about future sales. Short sterling prices are practically unchanged.

Australian bills – Bill prices were marginally weaker after a report showed ongoing confidence in the outlook for the Australian economy. The New York-based Conference Board index rose by 0.2% in August having risen 0.8% in July. The coincident or current reading of activity also advanced. Aussie government paper prices fell in response to ongoing turmoil for global markets midweek as dealers sent the 10-year yield higher by three pips to 5.234%.

Canadian bills – Canadian yields are rising and therefore widening against the 10-year U.S. treasury yield on Thursday after the premium narrowed to its lowest in two weeks. The spread over treasuries has narrowed during October from 37 basis points to 18 pips. The prospect of perhaps more FOMC buying starting next week is perhaps weighing on Canadian markets today. If the impact on U.S. growth is positive it could also be beneficial for the domestic Canadian economy, which would ultimately cast attention back to the need to tighten Canadian monetary policy. 90-day bill prices made minor gains.

Japanese bonds – A bullish session for Japanese government debt was sparked by optimism that the Bank of Japan would have to match the actions of the U.S. central bank. The Bank of Japan went to the unusual measure of scheduling its next meeting to shadow Wednesday’s FOMC meeting. The Bank may have to counter a rising yen by adding to existing monetary stimulus. The December bond future added 39 ticks to 143.57 sending the yield down to 0.90%.

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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