Irish bailout talk fuels bond sell-off

Peripheral Eurozone government debt prices surged on Friday following a G20 statement that appeared friendlier to prevailing debt holders amid market chatter that the vulnerable state in Dublin might yet guarantee further EU intervention perhaps as early as this weekend. Spreads narrowed sharply as Irish 10-year yields tumbled by 70 basis points while Portuguese fell by 30 pips.

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European bond markets – Despite official comment from the Emerald Isle that it has not requested further financial aid, the reality is that EU officials will likely offer it before markets get the chance to completely crack-up and force domestic government yields towards the moon. Yields on German debt rose by six basis points allowing a significant contraction of spreads following a dire performance this week that saw the premiums widen to record levels. The December bund contract rallied earlier as Asian stocks sold off sharply and commodity prices weakened in light of fears the Chinese might be preparing further monetary policy tightening. The contract has since slumped by 73 ticks to 129.45 sending the yield to 2.50% even after weakness in Eurozone industrial production data for September. The series fell by 0.9% indicating a weakening in export demand perhaps on account of a cooling period for global activity. Eurozone third quarter GDP also cooled following a bumper second quarter.

Eurodollar futures – The shape of the U.S. yield curve is morphing dramatically. Since the FOMC statement nine days ago the yield on the 30-year long bond rose by around 43 basis points as dealers figures this area of the curve would remain unaffected by the Fed’s actions. The Fed has ambitions on much shorter maturities and starts its buying program today and will purchase between $6-$8 billion in notes. Today the long yield slid by seven basis points to 4.26% while that on the 10-year rose by six pips to 2.71% forcing a dramatic flattening of this area of the curve. The bottom-line is that the need for the safety of fixed income is gradually easing and that supply is becoming a bigger driving force leading yields higher. Eurodollar futures are nevertheless in buoyant mood with implied yields slipping by around four basis points. Later this morning the Michigan consumer sentiment survey may show a reversal in consumer confidence for the first time since June.

British gilts – December gilts have broken down through a consolidation triangle sending yields two pips higher to 3.18%. The gilt market could have edged higher rather than lower after a weakening in consumer expectations over coming months. A reading from the Nationwide Building Society showed a dip to the lowest reading in 19 months in the consumer outlook. Short sterling implied yields are four basis points higher to close the week as the pound rallies against the euro and dollar.

Japanese bonds – Government bond futures rallied 31 ticks to 142.73 in the December contract as demand for safety popped. Asian stocks fell alongside heavy declines for some commodity prices over fears that China would act to slow its economy with more interest rate increases. The 10-year government bond yield fell one pip to 0.98%.

Australian bills – The overnight risk aversion tone caused yields to decline on Aussie government bonds by a pip to 5.33%. Implied yields on short-dated 90-day bills fell by four basis points as fears of a greater regional slowdown provided more support to the view that the Reserve Bank won’t be raising rates at the December meeting.

Canadian bills – Despite weakness in U.S. treasury markets there is little evidence of a spill over into Canadian credit markets. The yield on the 10-year government bond rose by two basis points to 2.985% while the December future posted a minor loss to 124.82. Nevertheless bill prices firmed in line with those of Eurodollars sending implied short-end yields lower by around five basis points.

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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