After four days last week when peripheral government bond yields narrowed against those of Germany, rising crisis management tensions resurfacing within the Eurozone have blown spreads out of the water again. Meanwhile, a weekend airing of an interview with Chairman Bernanke revealed the possibility that the Fed will need to act further to depress yields with a committee still concerned over the number of people without jobs.
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Eurodollar futures – Mr. Bernanke’s message was clear. The Fed has nowhere near completed its task of reviving the economy and with unemployment stubbornly stuck near a double-digit pace, the threat to a double-dip is greatest if consumer confidence rolls down the hill. With strengthening economic data sending bond yields up last week, investors had started to ask whether the Fed would even need to complete its $600 billion bond-purchasing program. Mr. Bernanke argued that it will likely take four or five years with growth at its present pace to bring the rate of unemployment down. In his eyes that made for a strong case to add fuel to the fire and launch further rounds of quantitative easing. The interview has sparked a wave of buying across the yield curve with the 2012 Eurodollar strip showing gains of eight basis points while the March 10-year treasury futures contract rose by 18 ticks to 123-05 sending yields lower by five basis points to 2.95%.
European bond markets – Bond prices in the region are moving in opposite directions once more. Greek yields surged by almost one half of one percent, while price declines for both Italian and Spanish bonds added double-digit increases to yields. At the onset of a regularly scheduled meeting of finance ministers in Brussels, there is growing discord over the handling of the sovereign debt crisis. The Belgians are offering the opinion that if the bailout fund is going to be enlarged at some point, it should be done sooner rather than later. Meanwhile France and Germany don’t agree with any kind of enlargement. Luxembourg and Italy have devised a mechanism for deepening the bond market for Eurozone-wide sovereign debt issuance although Germany says it won’t encourage nations to strengthen their fiscal position. German bund futures remain higher by 34 ticks in the March contract at 126-16 while shorter-dated euribor futures contracts have made three pip gains today.
British gilts – Other than performing in-line with the performance of German bunds, there was little to drive British debt prices. The March contract added 35 ticks to 119.52, although the contract can’t seem to break above Thursday’s high. The British market is also comforted by the statement from Mr. Bernanke and is keeping sentiment positive over the length of time the easy monetary veil will shroud the economy. Short sterling prices added around five basis points.
Japanese bonds – Friday’s resurgent yen on the back of a U.S. employment report that lacked sufficient vigor helped boost demand on Monday for Japanese government bonds. Prices rose sharply with the March contract adding 63 ticks to 140.69 sending the 10-year yield down by five basis points from a near-five month high. The weakness in the reading for non-farm payroll of just 39,000 jobs drove the yen back towards its highest in a month and instilled fears that the bank of Japan might need to act further to relax its own monetary policy.
Australian bills – The yield curve steepened marginally on Monday with bond yields rising by one basis point to 5.42% while the implied yield on 90-day bills declined by two basis points along the strip. The Reserve Bank is set to maintain short interest rates at 4.75% when it meets Tuesday to discuss the economy.
Canadian bills – The price of the March Canadian bond future is testing Friday’s high to trade at 121.97. The contract is already higher by 56 ticks on the session and a three basis point dip in the 10-year yield to 3.15% is accompanied by implied yield declines of twice as much along the strip of short-dated bills of acceptance. The Bank of Canada also meets on Tuesday and is unlikely to further restrict monetary policy at this stage.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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