Investors don’t seem to be driving markets too far in either direction and after little by way of surprise to a report showing the pace of U.S. output, traders have little impetus to push much further. Yields still appear elevated after a 40 basis point surge since politicians agreed to an extension for tax cuts. Curve movement remains limited although the weight of warnings from credit ratings agencies over possible further downgrades for European sovereigns is pushing core German yields down again.
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Eurodollar futures – U.S. third quarter growth was revised up a notch to a 2.6% pace of growth, although less than optimists had penciled in. Yields are a little softer today following a slump in mortgage applications through last weekend. Applications to finance or refinance home loans fell by 18% during the week although the dip one year ago of 10% confirms some sense of seasonality during the holiday season. Home sales in November did rise, but once again fell short of bullish expectations. March Treasury note futures earlier rallied to 120-14 but are currently flat at 120-08 yielding 3.33%.
European bond markets – Yields are lower with talk of Ireland making an immediate capital infusion into its major bank, while China appears to be on the cusp of buying Portuguese bonds either in the secondary market or next year as issued. But the brace of positive developments appear to be channeling more negatives into weakness for the single currency and sparking a further rebound for the German yield curve. Two year yields fell seven pips while 10-year bunds dipped four basis points to 2.96%. The March bund contract rose to a session high at 125.61 before feeling the weight of a neutral treasury market and stand at 125.45. Earlier in the day a report showed German import prices surged 10% during November and up from a 9.2% pace. The reading was the highest in a decade, although it is far from creating inflation fears. The ECB also provided more liquidity than was expected indicating a willingness to provide for a still nervous financial system. With around €135 billion in maturing loans this week, the central bank added around €150 billion at today’s infusion.
British gilts – March futures are also off session highs at 126.68 with yields now down just one pip to stand at 3.49%. Third quarter British growth was revised marginally lower, which also bolstered demand for fixed income. The minutes from the December monetary policy meeting revealed little more than a 7-2 split over the path for policy. Short sterling futures are higher by four basis points as implied yields slip.
Japanese bonds – The Bank of Japan sounded cautious about the prospects for exporters in light of a recent rise in bond yields. Bond buyers subsequently flocked to an auction of two-year paper issued by the government with 3.5 bids for each available bond. The March JGB future powered ahead rising 35 ticks to close at 139.97. Yields fell towards their lowest in three weeks to close at 1.13% as stocks declined.
Australian bills – Rising confidence in the Australian recovery was confirmed by a gain in the Westpac leading indicator for October. The index added 0.3% and is intended to gauge conditions six months forward. Bill prices fell sending implied yields four pips higher while the 10-year government bond yield added four basis points to close at 5.59%. The Aussie dollar traded briefly at par with the U.S. dollar ahead of U.S. data as tensions subsided along the Korean peninsula following recent military drills. Rising risk appetite has boosted the appeal of riskier bets but at the same time weighs on fixed income prices forcing yields higher.
Canadian bills –Canadian bonds are underperforming midweek allowing the premium investors demand to hold comparable U.S. debt to decline to 14 basis points. Last week the spread widened to almost 25 basis points. Futures on short-dated paper were broadly unchanged.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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