A recent quarter-point surge in U.S. 10-year yields has provided buyers with an opportunity to pile back into government debt ahead of next week’s announcement from the Fed. Traders have tried to size up the scale of the plan but still appear bamboozled by what might yet be delivered. A weakening in Asian regional data sparked profit-taking and ensured risk-off today meant a resumption of the move towards lower yields. In Europe, meanwhile, the glare of the spotlight appears to be shifting – in a bad way.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis.
Eurodollar futures – December 10-year note futures made gains following confirmation that the annualized pace of growth in the quarter through September accelerated in line with a 2% forecast. Gains for bond prices drove the yield down to 2.614% having reached 2.74% earlier this week. Had the report outpaced expectations, dealers might have scaled back expectations for Fed action next week, but based upon the consensus reading there’s perhaps now an element of “gloves off” from the Fed. The rally in notes today brings the price of debt back to unchanged as the quarter comes to an end.
European bond markets – It’s all happening in the Eurozone once again, or perhaps it might be better to state that the attention is once again back on the negative factors around the region. The spotlight that was glaring down on the plight of peripheral nations just six months ago was stolen over the early summer by tales of a phenomenal growth story emerging in core Europe. Gains for German and French industries and for manufacturers took hold as the euro tumbled to below $1.20. The traction continues to this day. However, with fiscal retrenchment set to impact European nations in 2011. That spotlight is starting to shift back to a resounding chorus line spearheaded by ongoing problems in Ireland, Portugal and Greece. Their problems hardly mattered when the powerful economies at the center of the economic area powered forward. A battle between the Irish government and irate bondholders of nationalized Anglo Irish bank is at a stalemate. The Portuguese political parties can’t agree on how to implement budget measures while Greek revenues are worsening as the cost of running the budget deficit surges. But until growth shows signs of turning the corner, negative commentary on the plight of peripheral nations will be overshadowed. German retail sales data today returned a second monthly decline counter to expectations of a gain. September store sales fell by 2.3% while an earlier reading was revised down leaving the annual pace of growth at a meager 0.4% rather than a 2.2% pace. December bund futures responded with a 38 tick rally to 129.16 shaving three pips off the yield of 10-year paper to 2.528%.
British gilts – Gilt futures surged and the December contract added 57 ticks to 123.23 in a better environment for fixed income. The week has been molded by a rather strong domestic growth report that left bond traders concerned that the Bank of England might now delay further measures to stimulate the economy. However, tepid credit market data provided Friday by the Bank suggested that the performance is unlikely to be repeated. Even an unexpected rise in consumer confidence came with a caveat from the data provider that consumers will need to factor in the impact of government spending cuts in the months ahead. The government bond yield declined by six basis points to 3.08%.
Australian bills – The chances of an interest rate increase resulting from next week’s Reserve Bank meeting continue to look slim. Consumer and business credit expansion remained at a 0.1% pace despite hopes for a reading three-times that pace. Implied yields declined by a couple of basis points to reflect the less optimistic economic outlook. The Australian curve has just one further quarter-point rate increase currently baked in before next summer with an additional rise on the books by the end of 2011.
Canadian bills – The Canadian economy expanded at an as expected 0.3% monthly pace in August while industrial production data fell marginally short of forecast with a 0.2% gain during September. Government bond prices rose sending the 10-year yield lower to 2.85%.
Japanese bonds – Despite a variety pack of data showing the Japanese economy slowed in late summer, bond prices pared recent gains. Dealers took the view that even if the Bank of Japan follows the lead of the U.S. Federal Reserve next week, record low yields will struggle to attract buyers of freshly issued government debt going forward. The 10-year yield added two pips to 0.92% even after nationwide consumer prices fell at an annual pace of 1.5% through September. Construction orders fell 15% compared to a year ago while industrial production contracted by 1.9% on the month – more than three times the predicted decline. A Nomura/JMMA PMI report indicated a contracting pace of manufacturing output.
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.
