Global yields are pushing on the highest in six months once again at the end of a week in which a resolution to a tax gridlock in Washington changed perceptions over U.S. growth and damped demand for safer assets. A jump in U.S. exports confirming healthy overseas demand also served to pressure bond prices after an optimistic start.
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Eurodollar futures – The October trade deficit narrowed to $38.7 billion as exporters rose. The September deficit stood at $44.6 billion. The March 10-year note future reversed course after the data reaching 120-15 to yield 3.26%. The lowest point of the week drove the contract down to 120-04 lifting yields to 3.33%, the highest since May.
Michigan consumer sentiment reached 74.2 in December and will likely further boost confidence in the domestic recovery weighing further on bond prices. Deferred Eurodollar futures are lower by five basis points from December 2013 maturities and beyond.
European bond markets – Higher German bund prices have given way to marginal losses later in the session as pressure returns on peripheral Spanish and Italian debt prices. Both nations face bond auctions next week while German and French leaders are digging their heels in over the size of bailout funds and whether an E-Bond facility to reduce risk would benefit the Eurozone. The March bund contract is lower by six ticks at 124.89 to yield 2.95%. Irish benchmark yields have risen by 11 pips on Friday, while Spain and Portugal are both higher by 15 basis points. A reading of German wholesale prices for November showed a still robust 7.8% annualized gain. Euribor futures are down by three pips.
British gilts – A strong reading for U.K. core producer prices in November kept a lid on gilt futures on Friday. The March gilt future dipped four ticks to 118.39 to yield 3.50% after the index rose 0.2% between months and 3.3% on the year. Demand for gilts eased during the week as stocks advanced by 1.2% and the economy continued to end the year on a strong footing.
Japanese bonds –March JGB futures surged 66 ticks to 139.78 and erasing nine basis points from the benchmark 10-year government bond yield, which closed the week at 1.18%.
Australian bills – Australian yields remained unchanged at 5.60% ahead of the weekend in which China is expected to further tighten its monetary policy to cool rising property prices. Bill prices saw little activity and closed with minimal losses.
Canadian bills – I noted earlier in the week that U.S. and Canadian benchmark 10-year yields had narrowed sharply from 37 basis points to two in a matter of weeks. On Friday yields completely converged. Investors now wonder just how quickly the U.S. recovery will accelerate in light of the extension of tax cutting deal. The convergence also highlights the sanctity of Canadian debt where the budget deficit is not only a relatively small one compared to output, but is predicted to vanish within five years. In Friday’s data the Canadian trade deficit narrowed as exports growing at 3.1% outpaced a 1.2% increase in imports, which were depressed by a strong domestic dollar. Implied yields on 90-day money rose by five basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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