Bonds driven to third straight gain by Eurozone woes

There is a firmer bid to bonds to start the week as demand for fixed income is once again vogue after a string of losses that drove yields up to a seven-month peak. Military frolics in South Korea also have the world awaiting a response from the North, but safe to say that investors have one eye on the safety of bonds with just two weeks before the end of the year. Bond prices are on the rise for a third straight day with the U.S. 10-year yield coming back sharply after visiting 3.56% last week.

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Eurodollar futures – March Treasury note futures have rallied again shaving another seven basis points off the yield to 3.27%. The New York Fed is expected to purchase $17 billion in two planned purchase commitments today. Deferred Eurodollar futures contracts are making double-digit gains in light of today’s slump in yields and as the yield curve flattens.

European bond markets – German bunds are having a strong day, although it’s not for the feint-hearted. A strong start to the session saw the March contract reach a session high of 125.28 before fears over ratings of European governments subsided. Conventional wisdom currently carries a seed of doubt that nations will face even more challenges in 2011 as they try to rollover maturing debt. The March contract pared gains to put in a session low at 124.67 before rallying back towards the day’s highs stripping four basis points off the German benchmark yield to 2.971%. Fears have surfaced that France is likely to become embroiled in the debt crisis that has thus far been felt largely by the peripheral nations. But with French banks holding the lion’s share of peripheral nations’ debt and the government needing to make greater inroads into its budget deficit, investors are growing concerned. Credit default swaps used to protect bond holders against the prospect of default have tripled during 2010 and imply a sovereign credit rating seven notches below the official rating awarded by Moody’s ratings agency.

British gilts – When yields around the world slide, so do those in Britain regardless of today’s shot across the bows from trade body, the Confederation of British Industry. It forecast that the central bank would be in rate-raising mood within six months as price pressures leave it with little alternative. For now the market is nonplussed by the words from the influential trade body. March gilt prices rose to 118.65 sending yields back to 3.50%. Short sterling futures also rose as European worries resurfaced. The CBI says that short rates will end 2012 at 2.75%, which would imply a three-month Libor at around 3%. In comparison, the December short sterling future implies a yield of 2.38% keeping it well at odds with the thoughts of the CBI.

Japanese bonds – Japanese yields were easier in response to the global rally for bonds on Friday. The March JGB future added just five ticks to close at 139.86 carrying a yield of 1.175%. Investors expect the Bank of Japan to spell out no changes in monetary policy along the horizon for as far as the eye can see when it meets this week.

Australian bills – Tension in the Korean peninsula edged some investors towards the safety of fixed income and depressed the Australian benchmark by six basis points to close at 5.51%. Shorter dated 90-day bill prices rose by just one basis points as investors await the minutes from the recent central bank discussion on interest rates.

Canadian bills – Canadian short-dated paper is underperforming its U.S. counterpart as implied yields decline by three basis points along the curve. Falls in yields at the 10-year are also less than on Treasury futures with the U.S. premium narrowing to 13 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.

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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