Monday is proving to be another tough start to the week for bond investors after U.S. yields rose by 31 basis points last week. A theme of more solid recovery continues to bolster demand for stocks and commodities and at the same time reduce the need for the traditional safe haven status of bonds.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis.
Eurodollar futures – Investors’ confidence in the health of the economic recovery has turned 180-degrees in the space of less than a week following the Washington tax deal of last week. Incrementally firmer economic data has been bolstered by a boost to growth from maintaining low taxes for a further two years. With 10-year yields reaching 3.39% to start the week, members of the FOMC meeting for the final time this year when they gather in Washington on Tuesday will be perturbed as they examine a 106 basis point ascent since yields touched 2.33% earlier in October. As a consequence of this new-found confidence in the recovery Eurodollars continue to decline sending market implied readings higher, which is also playing out through a steepening of the yield curve. The December 2012/2013 one-year calendar spread for example has shifted dramatically in less than one month. On November 11 the spread between the two contracts spanning exactly one year stood at 66 basis points. Today that spread has widened to 104 basis points as the market’s expectation changes towards monetary policy, specifically wariness in the perpetuation of ultra-low interest rates. March notes reached a low at 119-11 earlier before paring losses to stand at 120-02 where the yield reads 3.34%.
European bond markets – Sellers failed to drive March German bund prices through last week’s bearish lows earlier this morning and the contract has recovered losses to 124.73 although still lower on the day by 24 pips. The intraday low at 124.38 saw buyers creep in to buy government paper yielding close to 3%. Eurozone ministers meet later in the week to discuss further permanent measures to better provide a framework for countries that need help under the burden of slow growth and high budget deficits. At the same time the ECB is trying to fathom ways to wean domestic banks off emergency liquidity provisions into 2011. Euribor futures are making mild gains to start the week.
British gilts – Gilt futures expiring in March are having a hard time shaking off a 9. % year-on-year gain for producer input prices in November. The contract is lower by 32 ticks at 118.02 and remains eight ticks off the daily low. Short sterling futures are unchanged after a bearish report and prediction from Rightmove on English and Welsh home prices, which are expected to continue declining by 5% through the end of 2011. The 10-year government gilt yields 3.55%.
Japanese bonds –March JGB futures fared horribly to start the week as risk appetite resurfaced in the Far East after Chinese authorities maintained an unchanged stance on interest rates despite a jump to a 5.1% annualized pace of inflation. The March JGB slumped by 75 ticks to 138.96 sending yields five basis points to 1.225%. Regional stocks rose and once again diffused demand for the safety of bonds.
Australian bills – Australian 90-day bill prices dipped by four basis points as risk appetite received a fillip from China’s inaction. The yield on the government 10-year benchmark bond added eight basis points as the environment for fixed income was once again dashed by returning risk appetite and settled at 5.64%.
Canadian bills –U.S. 10-year yields are now firmly above those on comparable Canadian 10-year bonds. The environment for Canadian paper is preferable given the lack of worries on the horizon for its budget deficit. The government expects to eradicate the shortfall within six years while that of the world’s largest economy is expected to run at an equivalent 4% of GDP through 2018 at the earliest. Shorter-dated paper prices fell by three basis points.
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.