Ten year note futures rebounded after sellers drove price sharply lower following the first sub-400,000 weekly initial claims report since July 2008. Claims for unemployment benefit in the week ending Dec. 25 fell by 34,000 on the previous week to stand at 388,000 in a further sign that the labor market is thawing perhaps more than expected. Although yields are higher than before the release, a strong midweek rally in bonds has shaved monthly losses as the recovering economy reminds investors that official rates will have to rise at some point.
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Eurodollar futures – But that point remains a distant point on the indefinite time horizon for now and despite the report, investors stepped back into the arena to lock-in to relatively high yields. The March treasury note future slipped to a session low at 119-25 before recovering to 120-04 where the yield rose to 3.37%. Eurodollar futures pared some of the prior day’s gains with deferred maturities easing by four basis points.
Japanese bonds – March JGB futures surged to a three-week high with a closing gain of 67 ticks to 140.67 in face of a strengthening yen. The unit has been propelled higher by exporters repatriating overseas earnings ahead of year end while broader demand for Asian currencies has emerged as the Chinese yuan has been allowed to appreciate slowly. Sentiment in the region has been encouraged by an improving U.S. economic recovery, which is a boon for low-cost industrial and manufacturing venues in the East. The Japanese 10-year yield fell by three basis points to 1.12%.
European bond markets – March bund futures soared having missed the midweek rally in bonds with the contract higher by 50 ticks at 125.27. The yield eased by five basis points to 2.96%. Italian business confidence rose to a three-year high but that fact failed to deter buyers heading for the safety of German paper. Meanwhile a badly received Italian bond auction widened the premium between domestic and German bonds by eight basis points on the day.
British gilts – Once again the domestic market was more responsive to events in the U.S. rather than much going on in Britain. The 10-year yield slid by nine basis points to stand at 3.467% in extremely thin trading. The March future added 83 ticks to 118.69. Short sterling futures also rose shaving up to eight basis points off implied yields.
Australian bills – Implied yields also fell in response to the improved tone in American bond markets. Domestic bill prices made gains of five basis points while the 10-year government note fell by nine basis points to 5.583%.
Canadian bills – The improving U.S. labor market weighed on Canadian credit markets sending the 10 year note future expiring in March lower by some ticks to 122.10 offering a yield of 3.14%. A positive outlook for the fiscal stance of Canada has encouraged investors to favor bonds issued by Ottawa over those issued in Washington. The spread between comparable bonds has widened to 23 basis points with investors demanding more to hold American debt. During the final quarter of the year that relationship has completely inverted.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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