Fixed income prices are once again on the decline after more proof that U.S. consumers are doing their part to aid the blossoming recovery. Bond prices reversed from a positive earlier start with the 10-year yield surrendering eight basis points from Monday’s rally. In Europe bond markets reversed direction in sympathy with the North American action ahead of the Fed’s afternoon meeting.
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Eurodollar futures – Stubbornly high unemployment is less of a focus when consumers are drawn to the malls in droves attracted by deeper and earlier discounts. November’s retail sales report showed a healthy 0.8% improvement after an upwardly revised 1.7% in October, while ex-auto sales were twice as strong as forecast at 1.2%. The consumer is set to spend the most since 2006 according to a recent survey from the National Retailers Federation while economists have already boosted next year’s year-on-year gain for spending to 2.6% following the recent payroll tax cut and extension of tax cuts. On Tuesday afternoon the FOMC will deliver a statement. Look out for whether it changes tack in light of the Obama accord with Republicans. Since that time economists have scrubbed out old growth forecasts replacing them with an increase in GDP. Before that Fed Chief Bernanke said he’d step up bond purchases used to artificially depress bond yields to stimulate demand. Some in the market are expecting that point to be underlined. Failure to do so could further depress bond prices should the Fed waiver from its earlier script. The March note future has shed a half point to yield 3.37% while Eurodollars remain on the back-foot as the curve continues to steepen with losses extended at deferred maturities.
European bond markets – As U.S. treasuries reach for new session lows at around 10:30am ET, European markets are following suit. Earlier markets were buoyed as investors were eager to lock-in to the recent rise in yields and responded to some palatable data. Eurozone confidence rose according to the December ZEW, while it tapered off somewhat in Germany and so unseated fears of overheating, while Italian Prime Minister Berlusconi survived a confidence vote in Parliament. The strength in U.S. data combined with an ongoing slide in Spanish bonds now in its seventh day and a move to negative watch for Belgium’s AA+ credit-rating has further soured the tone. March bunds are close to a low point at 124.39 and face an 18-tick loss on the session having been 41 ticks better earlier. German benchmark yields rose towards 3% once again.
British gilts – March gilt futures look a little nasty. Not only is the international environment causing the domestic market to crack, but also today’s consumer inflation data caused worry for fixed-income traders. The 3.3% year-over-year pace of increase was the highest in six months and leaves inflation running beyond the government’s 3% ceiling for a ninth month straight. Currently, gilts are lower by 20 pips at 117.74 lifting the yield on the benchmark bond to 3.56%.
Japanese bonds –March JGB futures rose a little, but cash markets fell sending yields three pips higher to 1.25%. Later in the week manufacturers are expected to report declining activity and confidence in the final Tankan report for the year. However, the bigger influence currently is the international tone, which depicts a better outlook for economic activity globally.
Australian bills – Australian 90-day bill prices were marginally higher following a report depicting a 13.2% dip in dwelling starts in the third quarter. Nevertheless as risk appetite continues to swell in the aftermath of no immediate change to Chinese monetary policy, Aussie government bond yields rose adding six basis points to 5.64%.
Canadian bills – Leading economic indicators for November rose by less than predicted with a 0.3% gain, but the previous month’s data was revised higher. Bond futures fell heavily and stand lower by a whole point at 120.37 to yield 3.33% and pushing the U.S. premium over Canada to four basis points. Bill prices shed seven pips as implied yields jumped.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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