Bond prices driven higher by bargain hunters

After a couple of days of furious selling that has driven yields to six-month peaks, investors have found little reason to continue today even in the face of another U.S. labor market report that saw fewer unemployment claims. There appears to be some determined buying as yield-starved investors attempt to lock-in to higher rates.

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Eurodollar futures – The March 10-year note future is a full point off midweek lows that drove yields up to 3.28%. Today the contract trades at 121-02 despite a decline to a two-year low in the number of continuous unemployment claims. Weekly initial jobless claims also came in lower than expected at 421,000 from a revised 439,000 the week before. In the wake of last week’s shortfall in job creation the implied yield on the December 2011 contract slid to 0.65% as investors quickly reckoned that The Fed’s job was far from done leading to a protracted era of low interest rates. However, expectations were slammed back to earth following the President’s compromise with Republicans over an extension of tax cuts enacted by his predecessor. The December 2011 contract currently implies short-term interest rates will stand at 0.83% in a year’s time.

European bond markets – After two days in the doldrums, German bunds have climbed as investors took advantage of 3%-plus yields for the first time since May. The March contract is 73 ticks higher and trades at 125.13. There was little data to cause any fundamental change today other than a ratings downgrade for Ireland’s debt. This hardly caused a panic given the state of the nation’s financial industry. Fitch commented that “Ireland’s sovereign credit profile is no longer consistent with a high investment-grade rating.” German inflation remained tame throughout November according to a report today with consumer prices rising by 1.5% compared to a year ago.

British gilts – Back-month short sterling futures edged higher as the March gilt future added 54 ticks sending the yield down to 3.49%. The Bank of England had an easy job today and left interest rates and its bond purchase plan alone. The economy is doing okay for now and better placed than many had forecast ahead of fiscal changes due to take place in January as part of an austerity package.

Japanese bonds –March JGB futures declined 6 ticks to 139.24 sending benchmark government bond yields four basis points higher on Thursday to close at 1.27%. A previously reported GDP report was revised higher to leave third quarter growth 4.5% higher on the year.

Australian bills – Aussie bill prices slipped a further nine basis points sending implied yields higher as investors revised their money market forecasts after a glowing jobs report. The November employment report revealed the addition of 54,600 predominantly positions and provides more evidence that the economy continues a healthy expansion. Earlier in the week the RBA passed up the opportunity to raise interest rates further having done so seven times during 2010 to leave them steady at 4.75%. The December 2011 bill price has now fallen by 20 basis points in the past couple of sessions as investors defend against the likelihood of further monetary tightening next year.

Canadian bills – The U.S.– Canada 10-year yield spread narrowed to less than two basis points in favor of the smaller nation on Thursday. The yield on American bonds maturing in 2020 snapped back twice as hard as those on Canadian bonds as bargain-hunters locked into fixed income. The March government bond future added 29 ticks to trade at 121.38 sending the yield down to 3.227%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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