Bonds take data on the chin after string of losses

Bond investors are having a tough-time towards the end of the year, facing firmer economic data points and continued sovereign woes across Europe. Spain failed to find enough buyers at an auction today causing yields to rise. Yesterday buyers were disclosed the potential from Moody’s of a possible downgrade although the ratings agency stopped short of predicting the need for a bailout. Germany continues to strengthen and its yields are on the rise again forcing bonds issued by surrounding nations to decline. In the U.S. a meteoric rise in yields is starting to attract buyers although once again the data is turning out just fine.

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Eurodollar futures – The fact that robust economic reports out on Thursday failed to push bond prices down any further is a good sign not just for battered dealers but also the economy. The Fed’s bond-buying plan is struggling to create the conditions necessary for its initiative to succeed, but then again the data doesn’t smack of economic weakness. March treasury futures touched a low midweek at 118-20 yet a healthier report for both housing starts and initial jobless claims on Thursday saw buyers supporting the market form 118-24. Currently the market is in the black with the contract trading back above 119-00. Initial claims of 420,000 was weaker than forecast and a continued sign that the labor market continues to recover. October housing starts data was revised higher while November data came in stronger than forecast at an annualized pace of 555,000. The only dark spot was a dip in building permits, typically a gauge of future activity. Eurodollar futures stopped their descent and some bargain-hunting was in evidence leading to minor contract gains.

European bond markets – EU leaders will try over the next 48 hours to agree on concrete plans to deal with future sovereign debt crises. In the meantime Spanish yields rose when it failed to attract enough buyers at an auction today. Manufacturing activity in Germany unexpectedly shot up according to the monthly PMI report, which helped drag down March bunds to 124.00 and the contract appears to want to again test the session low at 123.87. The benchmark yield at 3.04% remains close to a seven-month high as the need for the safety of government paper takes a backseat.

British gilts – A startlingly strong report for British retail sales was backed-up by an upwards revision to the previous month’s data. Analysts are still wondering whether the pending sales tax increase due to come into effect in January is eating into 2011 sales, but regardless, the report shows an economy firing on every cylinder but that of the housing market. March gilts traded through a midweek low and remain 17 ticks weaker on the day at 117.28 yielding 3.63%. A Bank of England report today showed consumers expect inflation over the next 12 months to run at the highest pace in 27 months. The survey taken in November showed respondents expect prices to increase by 3.9% within a year and above this week’s latest reading of an above-target 3.3%. Short sterling futures shed four basis points as implied yields rose.

Japanese bonds – Cash yields rose in Japan for the fourth day lifting the 10-year benchmark to 1.27% and the highest since April. Japanese bonds were dragged lower by improving confidence in North American markets with treasury yields acting as a magnet around the world lifting those elsewhere in direct response. March JGB futures rose by 17 ticks to 139.12. International bond investors sold more Japanese government paper in the previous week and rotated into stocks as bearish fundamentals descended on fixed income markets.

Australian bills – Australian 90-day bill prices dipped by a couple of basis points in response to a Reserve Bank report indicating that a recent trend of firming utility prices was likely to remain a factor for several years and remains a driving force behind rising Australian prices. A separate report showed consumer inflation expectations pared a 3.1% gain in November to stand at 2.8% in December and so below the government’s 3% target ceiling. The 10-year yield remained unchanged at 5.65%.

Canadian bills – Shorter dated bill prices are lower in Canada and underperforming nearby Eurodollar maturities. The 10-year benchmark spread widened to 20 basis points this morning with the U.S. government having to pay more to attract buyers than Canada.

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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