Bonds retreat as global outlook improves

IB Interest Rate Brief: Bonds soggy after Plosser comments

Yields are firmer around the world ahead of a long holiday weekend following bullish comments from the head of one of the Fed’s regional banks. When the Fed announced in November its $600 billion plan to purchase bonds it hinted that that the number might change and while many predicted this number could be massaged upwards, few looked the other way. Charles Plosser said that the Fed might be forced to stop buying prematurely if his rosy projections for 2011 are anything to go by. Losses for bonds prices have been pared following in-line-to-lower readings for durable goods orders.

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Eurodollar futures – Philadelphia Fed Chief Charles Plosser said that had he been a voting member at the December FOMC meeting he’s not sure he would have voted in favor of a second round of quantitative easing. Mr. Plosser, who will vote at 2011 FOMC meetings, said he’s not so worried over the potential for deflation instead predicting a 2% reading for CPI and a healthy growth rate of between 3–3.5%. He also warns that the Fed might be forced to abandon its $600 billion bond buying spree prematurely should newfound confidence and growth maintain their respective pace. His words have soured the bond markets driving yields higher ahead of key reports on Thursday and ahead of the long holiday weekend. Eurodollar futures have fallen by seven basis points as dealers lock into low implied yields by selling contracts. The March treasury note future has tumbled 12 ticks to 119-20 sending the yield four basis points higher at 3.38%.

British gilts – A positive start for March gilt futures has given way to as sellers keep a firm eye on rising yields in North America. March futures traded to a session high of 118.73 following a Daily Telegraph interview with Bank of England official Paul Fisher in which he warned that the British economy might have a quarter of contraction ahead. Some estimates put retailers’ fortunes sharply down as store traffic slides on account of the worst snowfalls in 150 years. However, Mr. Fisher raised the prospect of normalization in interest rates and set the stage for a return to 5% at some point in the future. He said it is important for consumers to recognize that monetary policy would at some point return to a normal stance. He warned that a 0.5% increase wouldn’t be sufficient to shock the economy but said that the central bank would only act if the economy demanded it. Short sterling futures slipped about four ticks as investors locked in to presently low borrowing costs. The yield on the 10-year stands at 3.50%.

European bond markets – Euribor futures continued to rally by a couple of basis points still basking in the ECB’s overly generous liquidity addition in this week’s operations. Nevertheless, German bund yields are unchanged at 2.94% despite an earlier rally in the March contract to 125.68. Recently the contract erased losses sending the contract lower on the session reaching a low point at 125.31.

Japanese bonds – Japan is closed for a holiday.

Australian bills – Far Eastern markets continued to bubble into the long holiday weekend sending the Aussie dollar sharply higher. The increasing confidence surrounding the health of the world economy leaves investors pushing interest rates higher as they ponder what the implications might be from the perspective of the central bank. Bill prices eased up to six basis points at deferred maturities with the one-year forward 90-day bill implying a yield of 5.59% in comparison to the present short-rate set by the Reserve Bank of 4.75%.

Canadian bills – Canadian bonds remain lower on the day despite a slightly smaller than forecast for GDP in November. The 0.2% pace of expansion compares to expectations of a 0.3% gain. March government bond futures have changed little in response to the data trading 17 ticks lower at 121.78 to yield 3.19%. Bill prices also fell in response to the soggy tone for most global short ends.

Andrew Wilkinson

Senior Market Analyst

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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