Bonds face mixed bag of fundamental factors

An earlier dose of good news for bond buyers in the form of rising fears over Chinese interest rates was dealt up a serving of bad news as the latest reading of labor market data in the U.S. showed better times. It’s another one of those eras when good news is bad and bad news is good. Bond yields around the world continue to edge higher in response to a growing sensitivity to budding inflationary pressures, even though they arrive simply in the form of healthy economic data.

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Eurodollar futures – Chinese growth accelerated likely catapulting its economy beyond the size of Japan for 2010. Even though inflationary pressures subsided, onlookers expect a statistical rebound throughout the first half of the year likely to be accompanied by further official increases in benchmark interest rates. The initial response fueled concerns over commodity demand and a weaker overall level of global output. Bond prices made gains shifting yield curves lower. However, a sharp slide in initial jobless claims in the United States to 404,000 shocked dealers who had earlier grown concerned about an anemic labor market recovery. Eurodollar futures slid by seven basis points while March treasury futures shed half a point sending the yield five basis points higher to 3.39%.

European bond markets – German bunds broke through a two-week low sending yields seven basis points higher faced with the double-whammy of a jump to a seven-month high for German producer prices in December and the continuation of healthy data from Beijing to Washington. The March contract slid to 123.62 at its session worst for an intraday decline of 72 ticks. Euribor prices followed in sympathy with short-dated cash futures losing seven ticks. Peripheral bond prices fared better following a Wall Street Journal article suggesting that the government of Spain is set to increase the transparency of its banking system through greater detail on its lending activity accompanied by capital injection that might top €30 billion.

Japanese bonds – A successful auction of 20-year bonds at which the Japanese government could have sold almost five-time the value of bonds it issued Thursday helped reverse a six-day price decline sending the 10-year yield to fall the most in a month. March expiration JGB futures prices jumped 50 ticks to close at 139.75 lowering the yield by six basis points to 1.195%.

British gilts – Gilt prices were more inspired by traditional bond market catalysts outside of the nation than domestic data. A CBI survey showed an unexpectedly large rise in business confidence amongst respondents in its January survey, while the total orders component within fell sharply perhaps indicating weakness ahead. Short sterling prices fell in line with losses faced by the European short end with the implied yield on the December expiration rising to 1.60%. The official benchmark short rate set by a harried Bank of England is just 0.5%. The yield on the sliding March gilt, also at a two week low today, rose by five basis points to 3.68%.

Australian bills – Aussie bills responded to weakness in regional stock markets over fears that China will act to stem its double-digit pace of growth. In 2010 the economy expanded at its fastest in three years while year-end inflationary pressures were at the most extreme in two. Benchmark government bond prices slipped marginally with the yield gaining a pip to close at 5.60%.

Canadian bills – March government bond futures accelerated faced accelerated losses in light of the improvement in U.S. initial claims. However, domestic data also served to dampen enthusiasm towards fixed income assets with a leading index for December not only rising faster than forecast but also building on an upwardly revised November data point. The leading index rose by 0.5% in both months while the series was reported earlier to have gained 0.3%. The November wholesale sales number also surpassed expectations rising by three times the forecast to gain 1.2%. Earlier data was also revised higher. The data perhaps mask to a degree the underlying health of the economy. The central bank, however, recognized the pace of expansion earlier in the week when it left interest rates alone warning that further policy adjustments need to be carefully considered given available resource slack in the economy. Short dated bill prices fared an implied yield gain of four basis points along the strip while the March bond future dropped 70 ticks and is heading towards its weakest reading in two weeks.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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