Debt prices have firmed sending yields lower after the European Central Bank bought bonds of so-called PIG-nations. Bonds prices of debt issued by Portugal, Ireland and Greece surged as the central bank sought to drive down yields ahead of auctions later this week. Those auctions have bond investors shying away from peripheral nations’ debt in advance with some choosing to watch from the sidelines. However, judging by the sharp decline in yields those investors may have already missed the boat by waiting.
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Eurodollar futures – March Treasury note futures are unchanged at 120-28 despite a positive start to trading on Wall Street where risk appetite is back in fashion. Eurodollar futures have made only mild gains as credit markets breathe easy on Tuesday. The 10-year yield eased to 3.305% having reached its lowest at 3.27% since December 20. The Treasury will auction $66 billion in maturities spanning the three-to-30-year maturity horizon this week.
European bond markets – Greek government bonds surged the most as central bank buying confirmed by dealers gouged 37 basis points off the benchmark cost of borrowing. Irish paper in early afternoon trading saw a yield slide of 32 basis points while Portuguese issues slipped by nine basis points. It’s not uncommon for dealers expecting to participate in government bond auctions to spend the days before diminishing their inventories in order to restock on freshly minted paper. Such conditioning allows participants to drive prices down to quickly turn a profit. And while that appears to be happening in Europe ahead of key auctions, the risks are too great for the ECB to idly stand by and watch a potential disaster unfold. The more yields rise in the run-up to an auction, the greater are the associated risks with buying, which could lead to a lousy auction that sees immediate and ongoing losses for those brave enough to buy. Judging such a point is clearly too hazardous for the ECB, who acted earlier to prevent the market from its pre-auction conditioning process. German yields fell towards the lowest in one month as demand for fixed income firmed up, while peripheral premiums narrowed across the board with the exception of Belgium whose weak political backdrop is hardly ripe for the spending cuts about to fall in to place. March bunds trade a little firmer at 126.31 to yield 2.86%.
Japanese bonds – Government bonds firmed overnight shaving a couple of pips off the 10-year yield, which closed at 1.18% in response to Monday’s raised temperature across European peripherals. The Japanese finance Minister announced an initiative to buy €10 billion in Irish government bonds to be issued over 24 months under a plan devised when Ireland succumbed to joint EU, ECB and IMF aid last month.
British gilts – March gilt futures have surrendered earlier gains delivered on account of weakness in the fortunes of retailers at the end of the year. However, the BRC report showing a decline of 0.3% is likely to be accounted for by adverse weather conditions rather than consumer weakness. That’s not to say that the outlook for the economy is rosy given the fiscal austerity program starting to kick-in that will leave the economy hoping for an offset in external demand. Gilts faded from a high at 118.87 to trade with marginal losses at 118.57 towards the close while implied yields on short sterling futures rose two basis points. The 10-year gilt yield slipped one basis point to 3.50%.
Australian bills – It may have taken investors a little longer than usual, but there are clear signs that the credit market is deviating from its earlier expectations for the path of official interest rates. There were already central bank hints last week when after flooding commenced in Queensland that the impact might be large enough to affect the national economy. Queensland accounts for one-fifth of national output. Investors were quicker to slam the Aussie dollar all week but lacked conviction to price in a far lower likelihood of the Reserve Bank shifting policy again this year. The March 90-day bill future traded to yield less than 5% for the first time since the days before the U.S. Federal Reserve announced its second wave of bond purchases at a time when expectations for easier monetary policy impacted global credit markets. The implied yield on the contract dipped to 4.95% and has recently traded as high as 5.12% at the end of last year. The implied yield on the December 2012 contract slumped to 5.21% from a recent peak at 5.64%. Government bond prices also gained for a second day as the yield curve flattened with the 10-year yield declining by seven basis points to 5.46%. The central bank will be challenged by measuring the impact on growth and as to precisely how long it will last. The market is sensibly moving to a position of no further changes in monetary policy as a result, but the path is long. Any government or central bank hint that the economy has become over burdened by the disaster down under could spark a further surge in Aussie 90-day bills.
Canadian bills – As the morning draws on and the longer equity prices remain firm, the less optimism there is in the credit markets. Government bond futures have soured and trade 33 ticks lower at 121.65 to yield 3.19% while the premium commanded by investors in Canada over comparable U.S. treasuries narrows to 12 basis points. Bill prices saw implied yields edge higher.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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