IB Interest Rate Brief: Strength in consumer spending lifts yields to 3-month high
The yield on the benchmark 10-year note surged to the highest since August following the fourth consecutive monthly gain for retail sales. The cost of government borrowing has continued to rise even after the FOMC laid out its plans for engineering conditions conducive to the business community. The fact that yields have risen by 35 basis points to 2.85% confirms that there is indeed life in the economy despite a seemingly contradictory report on New York area manufacturing.
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Eurodollar futures – The New York Federal Reserve unexpectedly reported a contraction in manufacturing activity across the Empire state and its immediate surroundings. The report was led lower into contraction territory for the first time since July 2009 by a drop in new orders as businesses appeared to come to the end of an inventory rebuilding process. However, it’s important to remember that this sector of the economy reflects just 11% of the overall economy and indeed with the report came a silver lining. Executives surveyed by the Fed stated that on a six-month forward looking business, they were optimistic sending the gauge from 40.0 to a reading of 54.6. Meanwhile U.S. consumers, whose activity comprises around 70% of the economy, were out in force during October boost retail activity by a firm 1.2% over the previous month. In response to the strength of retail sales bond investors dumped treasury futures sending the December contract to an intraday loss of three-quarters of a point to 125-06 to yield 2.85%. Two-year yields only rose by one basis point to 0.51% despite a weekend speech from Richmond Fed Governor Lacker who pointed to the likely need in “the not too distant future” for a tighter monetary policy in spite of relatively high unemployment. Eurodollar futures saw extended losses across the 2013 strip where implied yields gained by 13 basis points compared to a softer rise of just two basis points in the 2012 strip as the curve continued to steepen.
European bond markets – Irish yields fell as investors started to perceive a greater likelihood that an EU bailout for the nation will likely be put to it before it has to ask. As a result the perceived need for the safety of core government bonds is falling by the way side. December German bunds have lost 60 ticks to trade at 128.80 sending the yield up four basis points as the treasury spread over bunds widens out to exactly 30 basis points. German yields had recently been led down by the nose of falling U.S. yields even while continental data showed a convincing European recovery. Shorter-dated euribor futures are unchanged today.
British gilts – Gilts yields are rising marginally faster than German yields after the Bank of England informed the market that it would phase out one of the props it used to support the economy during the financial collapse. Of course British yields also rose in-line with selling in global bonds and failed to respond positively to a report from Rightmove showing a lengthening in the time it takes to sell a house in England and Wales. Home prices dropped by the most in three years as an increasing number of sellers tried to move and estate agents failed to drum up enough buyers. Short sterling futures rose by a couple of ticks on the softening prospects for the housing sector. The 10-year government bond future today yields 3.26% after the December futures contract slumped 63 ticks to 121.74.
Japanese bonds – A glowing GDP report out of Tokyo overnight further exacerbated selling in Government bond futures with the December contract sliding 80 ticks to 141.79 carrying a yield of 1.035%. The annual pace of expansion within Japan accelerated from a 1.5% pace to 3.9% draining demand for government securities and unwinding expectations that the Bank of Japan would need to execute any further its existing plan to buy a wide array of securities from the market to spur recovery. The report also dampened demand for the Japanese yen, further loosening the noose gripping the throats of exporters.
Australian bills – Aussie government bonds faced another slump to begin the week after the improved tone to demand across the region courtesy of the Japanese GDP report. The 10-year yield continued its climb and closed at 5.405% for a 10 basis point increase on the session. Data wise an auto sales report for October sales showed a monthly dip of 0.6% to leave the number sold 3.3% higher than a year ago.
Canadian bills – An increase in the yield on Canadian government bonds matched the rise in comparable U.S. notes following the stronger-than-expected retail sales report in the world’s largest economy. The December futures contract slid 54 ticks to stand at 124.06 while shorter-dated bills of acceptance were sold sending implied yields around three basis points across nearby contracts.
Senior Market Analyst
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