U.S. and German debt is in mild demand as investors start the week on a defensive footing in light of a round of debt auctions on behalf of Eurozone governments over which investors are growing increasingly worried. Growing tensions has caused an acceleration of yield spreads against German debt and sent European stock markets sliding. In the U.S. yields are lower following an insight into the world of the Fed delivered over the weekend by Janet Yellen who is also heading up the effort to deliver affective communication from the Fed to the rest of the world.
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Eurodollar futures – It’s impossible to say whether Ms. Yellen’s speech has laid the groundwork today for lower domestic yields in light of growing turmoil across the Eurozone. The March Treasury note future is close to the day’s high at 120-30 to yield 3.29% and three basis points lower than Friday’s close. With many investors seemingly confused by precisely how the Fed’s policy is intended to work, Ms. Yellen stated that inflation was probably 1% higher than it would otherwise have been had the FOMC not embarked on its plan of action. The Fed wound up its purchases of $1.7 trillion in mortgage and treasury securities last March before embarking on a second-wave of $600 billion in November. She also cited Fed researchers who believe that the policy action has accounted for the creation of 1.8 million private jobs and predicts a further 1.2 million by the end of 2012. She also denied claims leveled by overseas governments and domestic lawmakers claiming that the policy measures “do not appear to be creating asset bubbles or imbalances in the United States.” It may take the Fed seven years to get its balance sheet back to where it was at the outset if it starts to reverse its purchases from next year by $80 billion per quarter.
European bond markets – One wonders just how much straw the back of the European camel can bear. Trading got off on the wrong-foot this morning as investors eye-up the debt issuance calendar across the Eurozone. Portugal, Italy and Spain each issue bonds during this week while investors remain nervous over the outcome. According to market talk the ECB bought bonds issued by Portugal directly from banks this morning following a rocky start. As usual the remedy worked and sent the bears into hibernation for now and sent the 10-year yield sliding by 18 basis points to 6.89%. Greek yields also fell while Spanish, Italian and Belgian yields all rose. The March German bund is currently trading marginally higher at 126.17 to yield 2.86%.
British gilts – Short sterling futures slipped after weekend comments from Prime Minister Cameron who recognized the “extremely difficult task” faced by members of the Bank of England’s Monetary Policy Committee. Inflation has been above the 3% ceiling for nine months now, which Mr. Cameron referred to as “concerning.” Investors responded to the potential for an accelerated program of interest rate increases by selling short sterling futures down by seven basis points, pushing implied yields higher. The Halifax building society’s monthly home price index slumped 1.3% during December highlighting the weakening housing market. March gilt futures rebounded from earlier selling pressure that drove the contract to as low as 118.05. The contract has recovered all of its losses and currently trades at 118.51.
Australian bills – A rebound in retail sales during November would usually have given cause to put a dent in money traders’ confidence that the Reserve Bank’s job is done. In light of the Queensland flooding investors shaved eight basis points off the yield of the 10-year bond to 5.54% after a weekend of intense media coverage. Short-end money yields also fell by up to five basis points as the market moves to price out any sign that the central bank will raise interest rates later this year. Also bullish for the credit market today was a report showing Chinese trade data left the surplus sharply reduced in light of a slide in export activity. December data showed the pace of export expansion halved to 17.9% year-on-year while import activity dipped from 37% to a 25% pace of growth. As a result the trade surplus narrowed from $22.9 billion to just $13.1 billion and argues that domestic expansion is a little cooler.
Canadian bills – Canadian government bond yields eased in lockstep with U.S. treasuries this morning. The March government bond futures contract gained 22 ticks to 122.05 shaving two basis points off the yield to 3.16%. Bill prices ticked marginally higher but have little to drive them today.
Japanese bonds – Market closed for national holiday.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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