IB Interest Rate Brief: U.S. risk rally sours bond appetite
Bond prices dropped like a rock as investors reassessed European contagion issues and determined that the global recovery was not only sufficiently entrenched and on track but also unlikely to become derailed at the whim of rising threats to lesser European governments. A slew of data released Wednesday and before many investors leave for the week further boosted confidence in the recovery.
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Eurodollar futures – The tone was set for bonds by the slippage in the reading of initial claims for unemployment insurance through last weekend. The reading of 407,000 was a significant improvement on the recent trend and compares to last week’s 441,000. New home sales data coincided with a disappointing reading earlier in the week on existing home sales, which remains a known headache for the economy. However, the University of Michigan consumer confidence index came in strong at a reading of 71.6 for November after 69.3. Eurodollars slid while at the other end of the risk spectrum equity prices leapt higher. The recent spate of better-than-expected data continues to shake our pre-FOMC views about just how healthy the recovery process is. This rising period of yields is a real wake up call to those who implored the Fed to do more to help. The December treasury note future slumped by a whole point sending the yield higher by 11 basis points to 2.88%. Deferred 90-day futures shed up to 16 basis points as implied yields surged.
European bond markets – Another outside day on the charts for December bunds. Earlier weakness was quickly thwarted by a resumption of stronger U.S. data that scuppered worries surrounding an S&P downgrade of Irish government debt. The ratings agent left the outlook on negative watch stating that the size of the bailout is greater than it had penciled in earlier. Contagion fears subsided as the mood changed in American debt markets. There’s nothing like a recovering economy to deter fear it would seem. The December future rose to 129.20 before freefalling all the way down to 127.64 leaving it down 120 ticks on the session. The yield also rose by 11 basis points to 2.70%. Further souring bond appetite was a rise to a record reading for business confidence in today’s IFO reports.
British gilts – December gilt futures slid 71 ticks to 121.12 for a two-day low after the robust third-quarter GDP reading was confirmed in today’s data. Short sterling futures slid four basis points as the focus shifts away from the need to apply further quantitative healing.
Japanese bonds –December JGBs played catch-up with the bond rally that occurred in response to a Korean military clash over a Tokyo holiday. Data released Wednesday showed a jump in consumer spending at Tokyo and nationwide malls. Bond yields remained static at 1.114%.
Australian bills – Aussie government bonds slumped as investors resumed their appetite for risk allowing equity prices to rise and inspiring a recovery in the Aussie dollar. 90-day bill futures were broadly unchanged while the benchmark 10-year yield on government paper soared nine basis points to 5.482%.
Canadian bills – Canadian government bond futures declined following the generally encouraging raft of U.S. data. The December contract slipped to 122.98 for a dip of 65 ticks on the session but the rise in yields of six basis points to 3.16% was than south of the border. Recently the spread between the two benchmarks has widened out to 28 basis points from less than 20 earlier in the month.
Senior Market Analyst
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