Bond markets rally on Bernake QE2 defense

IB Interest Rate Brief: Bernanke sets firmer tone for bonds

A strong defense of the second wave of quantitative easing by Fed Chairman Bernanke to an audience in Frankfurt today has encouraged a more positive tone to global bonds. Along with what’s looking like an increasingly likely deal to aid the government of Ireland fixed income markets have maintained a bid allowing yields to come off their highest in almost three months in some cases.

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Eurodollar futures – The New York Fed will on Friday stretch out across the yield curve to buy some bonds expiring in 30 years as part of its overall effort to drive down borrowing costs as it seeks to foster what Mr. Bernanke referred to as “robust conditions for growth.” His strong defense of quantitative easing seeks to dismiss the accusation that the Fed is undermining the dollar to ensure growth. Both China and Brazil have blamed the Fed’s policies for encouraging speculative inflows of hot-money into their capital markets. December Treasury note futures have traded both sides of where they currently stand at an unchanged price of 124-15 to yield 2.89%. Deferred Eurodollar contracts have also fallen over the last several days in an environment of rising yields. With the curve responding to the ultimate prospect of an official tightening of monetary policy at some undefined point in time, curves have also steepened noticeably. The December ‘12/December ’13 calendar spread has widened by 20 basis points in the last few sessions to reach 86 basis points.

European bond markets – Having hit their highest since August, investors bought German government paper today allowing for a minor dip in the 10-year yield to 2.70% despite an unexpected rise in October’s domestic producer price data. The hopes are high for a solution to the Irish sovereign debt mountain and given the presence in Dublin of the joint IMF, EU and ECB team as they scour the books of the nation’s ailing banks, bond sellers are walking away from the skirmish realizing the current limited downside for bond prices. This week the spread between Irish yields above German bunds has narrowed to 540 basis points. December bund futures are trading with a slim gain at 127.51.

British gilts – The December Gilt contract is now hanging onto a minor prices gain at 120.59 in the face of no economic data today. British 10-year yields look set to close the week at 3.40%.

Japanese bonds – A close at a five-month high for Japanese stocks failed to deter JGB buyers following this week’s slump in bond prices that drove yields to a two-month high. Having reached 1.12% earlier in the week fixed income buyers were out in force and shaved four pips off the 10-year yield to close the week at 1.06%. The December futures contract closed 11 ticks firmer at 141.56.

Australian bills – Implied yields on Aussie short-dated paper finished the week one basis point higher across the curve as rumors flew in the Asian session that China was set to tighten policy imminently. In the event the PBOC did announce a 50 basis point increase in the reserve ratio requirement after markets had closed for the week. Still government bond prices crept back from the recent selling allowing yields to decline by five basis points on the session to 5.51%.

Canadian bills – Canadian government bond prices have bucked an earlier price gain and are slipping to the south side of unchanged in line with U.S. treasuries. The 10-year futures contract shed nine basis points to stand at 123.37 with a yield of 3.13%. Spreads against comparable U.S. paper has widened out marginally to 22 basis points in the past couple of sessions.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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