IB Interest Rate Brief: Global bond slide drives U.S. yields to six month peak
The world in which investors took solace in lowly yields on account of sovereign debt crises in the Eurozone and fears over the health of global recovery has suddenly changed after agreement to keep tax cuts in place. The lifeline for tax cuts stemming from the era of President Bush is set to add to consumption and will deliver a pace of growth that should return a 5% unemployment rate to the U.S. economy before 2014. Fixed income investors have been led up the garden path by Chicken Littles promoting a view in which the economy is destined for eternal sub-par growth. During the last two days global yields have surged to where they were six months ago. In the case of the United States, that means a rise of 75 basis points on government and business borrowing costs.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis
Eurodollar futures – Bond liquidation is typically associated with a turning point for monetary policy and is caused by investors demanding more yield ahead of expected interest rate rise. Usually the central bank starts harping on about pre-emptive strikes against inflationary pressures or investors eyeing vigorous growth start to jump ship. In either case falling bond prices send yields rocketing. Mr. Bernanke can’t be doing cartwheels along the corridors at the Fed in Washington. At the weekend he defended the latest decision to buy a further $600 billion and said that borderline growth of 2.5% simply meant that unemployment would stand still. It might therefore take perhaps five years to get growth back on track to achieve rising payrolls. In a stroke, and by simply maintaining the status quo, President Obama has nudged the annual GDP rate up a further half percentage point, which inherently should bring unemployment down faster than when Mr. Bernanke appeared over the weekend. The Fed can now afford more bonds since prices slumped, which is just as well since Mr. Bernanke’s next televised appearance will have him barking back that his projection for GDP has been lowered on account of rising yields. Adding to woes this week as investors fall over each other as they try to sell losing positions is another week of fresh supply. The treasury is selling a total of $66 billion in maturities ranging from three-to-10 years this week. Tuesday’s loss for bond prices was the steepest in 18 months while the continuation of the liquidation process continues today with the 10-year yield reaching 3.22% on Wednesday morning.
European bond markets – Data points hardly mattered around the world as the slide for government bonds fed from one time zone to the next. German 10-year bund yields reached 3% for the first time since May. Weakening demand at an auction of two-year bonds also harmed fragile sentiment. The Irish budget vote hurdled the first of four fences after which the EU bailout package becomes accessible. Today Irish bond prices bucked the trend allowing the yield premium over German bunds to narrow to the least in one month. Elsewhere in Italy lawmakers denied passage of the 2011 budget and have paved the way for a challenge next week to the government of Prime Minister Silvio Berlusconi.
British gilts – British 10-year gilt yields added another eight basis points to cross above 3.5% for the first time since June. Another rise of 18 basis points from here would leave yields unchanged on the year. A CBI survey of manufacturing and exporters order books revealed strong demand for domestically produced goods owing to a weak currency. Short sterling prices slid 10 basis points as dealers spared no part of the yield curve. The bank of England meets Thursday but is hardly expected to change its current posture.
Japanese bonds – Sellers bore a hole in the floor as March JGB futures took a 106 tick dive overnight sending yields to a five-month high. The five-year yield fared worst gaining 10 basis points for the most painful jump in borrowing costs since June 2008. The 10-year yield rose by eight basis points to 1.235%. Even below forecast machine tool orders for October couldn’t sidetrack bearish dealers.
Australian bills – Despite the fact that there is possibly little else to come out of the central bank in terms of tighter monetary policy, dealers still sent bond prices lower in line with those around the world. The 10-year yield rose to 5.61% as wary dealers take few chances ahead of Thursday’s employment report that could influence the Reserve Bank in the first quarter of 2011. The forecast is for a 20,000 rise in payrolls in November after just short of 30,000 the previous month. Implied yields rose on 90-day bill prices upwards of seven basis points.
Canadian bills – The yield spread between U.S. treasury and Canadian government 10-year bonds has narrowed markedly to trade at six basis points and in from 36 pips within the last couple of months. In Wednesday’s trade bonds issued by Ottawa fell sending the yield higher on the day by six basis points to 3.28%. The surge in U.S. yields over the past two days has eroded the differential massively. Short-dated Canadian bill prices also slid sending implied yields higher by 10 pips. A housing report showed an annualized pace of housing starts for November at a firmer than forecast reading of 187,200 units and up from an October reading of 167,800.
Senior Market Analyst
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.