A downbeat inflation report for prices paid by producers following a surge in benchmark yields towards 3% was met by willing buyers happy to hear consoling words from two Fed officials. Stocks have also followed through on Monday’s weak session providing a further prop of support to fixed income and government debt.
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Eurodollar futures – Fed-head William Dudley at New York’s Federal Reserve told CNBC television that investors have got it wrong if they believe it is not possible for the Fed to expand its balance sheet without generating long-term inflationary pressures. An interview conducted last week with Fed Vice Chairman Janet Yellen carried in today’s Wall Street Journal also sought to curb alarm bells resonating among investors over a build-up of inflationary pressures. She told the Journal that the Fed’s second-round of quantitative easing was not “some sort of chapter in a currency war” aimed at cheapening the dollar. Nor was the measure aimed at pushing inflation above 2% she said. Today’s producer price report came in far weaker than expected at 0.4% to yield an annual gain of 4.3% after gaining 4% in September. The government noted that much of the build-up in price pressures was solely on account of energy prices. Excluding this and volatile food costs, the index declined by 0.6% on the month – its largest decline in over four years – while the annual pace dipped by one-tenth to 1.5% compared to a year ago. Treasury prices are off Tuesday’s high, but the yield has still dipped six basis points having recorded a peak at 2.96%. Eurodollar futures are in buoyant mood chalking gains of four basis points in response to the weaker report.
European bond markets – Talk of an EU-inspired package being offered to the Irish government at the Finance Ministers meeting in Brussels today is not yet creating a better environment for Irish bond prices. Yields have increased by 18 basis points while those on German paper are unchanged. It’s unlikely that Ireland will immediately agree to such a coordinated effort immediately and might take time to mull any offer spearheaded by the ECB. German bund prices fell by 13 ticks in the December contract to 128.74. A pair of German confidence readings came out better than was expected. The ZEW current situation reading of 81.5 jumped by more than dealers forecast from a reading of 72.6 in October. A forward looking component of the survey aimed at judging conditions six-months ahead also rebounded to reverse a negative outlook posed in an October report.
British gilts – Gilt prices remain buoyant despite a worsening in the inflation profile. Consumer prices during October rose by 0.3% between months to register a 3.2% gain year-on-year thus requiring the Bank of England Governor to deliver an open letter of explanation to the Chancellor of the Exchequer. The December gilt future rose 23 ticks to 121.95 while short sterling contracts at deferred expiration dates saw implied yields decline by most, falling four basis points.
Japanese bonds – A slide in Asian stocks hot on the heels of a global decline on Monday along with a peak at a seven-week high for government bond yields was a compelling reason for fixed income buyers to come out of the woods. A services sector index showed a larger than predicted dip in September demand weighing marginally on the tone. Yields slipped by five basis points to close at 1.025% as the December government bond contract closed 27 ticks higher at 142.29.
Australian bills –Aussie government bonds rose after minutes from the November Reserve Bank policy meeting showed the decision to raise interest rates was finely balanced. The benchmark bond yield eased by three basis points to close at 5.41% and shorter-dated bill prices also gained as speculation grew that if media reports from China proved correct, China will continue to restrict its monetary policy dampening demand from Australia’s trading partner.
Canadian bills – Manufacturing sales data for September fell but by less than forecast. Canadian government bonds prices rose sending yields five basis points lower to stand at 3.097%. Bill futures rose exactly in line with Eurodollar futures.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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