Bond gains erased by surging consumer confidence

Rising U.S. equity prices have backed investors into a corner after a relentless rally and a turnaround in commodity prices is causing a feeding back into equity market weakness, which in turn is having a trickledown effect back into bonds. As a result yields fell ahead of a report likely to show a rebound in consumer confidence in the world’s largest economy. In the event, the Conference Board consumer confidence index blasted through expectations painting a healthy picture of household sentiment, weighing on bonds and reversing a dip in yields.

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Eurodollar futures – Upward revisions to U.S. and global growth within an IMF report today opened up old battle wounds as the monetary fund warned over risks to the global economy from the sovereign debt crisis across the Atlantic Ocean and from potential asset bubbles in emerging economies. The warnings dampened enthusiasm for commodities sending metals and grain prices lower while adding to an already weak crude oil market. March notes made some headway even before an expected gain for the Conference Board’s index of consumer confidence for January. Also this morning the Richmond Fed releases its index of manufacturing, which is expected to pare a recent gain. The 10-year note future rose by eight ticks to 120-15 sending the yield lower by four basis points to 3.36%. Eurodollar futures advanced by a couple of pips trading in advance of the data readings.

Canadian bills – Consumer prices rose by less than expected during December taking further pressure off the Bank of Canada to consider taking further measures to constrain both growth and inflation. Core prices measured by the central bank eased by 0.3%, leaving them higher year-on-year by 1.5%. The yield on the 10-year government bond slipped by three basis points to stand at 3.27%. Short-dated bill prices added up to five basis points sending implied yields lower by the same amount as traders pared bets that official short rates might rise.

British gilts – A huge miss on the primary reading of fourth quarter GDP sent short sterling prices surging as investors made prior day gains look miniscule. While the Office for National Statistics blames the worst weather in a century for a 0.5% contraction in the economy, traders focused on the fact that notwithstanding the snow, at best the economy would have stood still in the quarter when economists had predicted an expansion of 0.5%. At best the March gilt rose by more than a point to 118.19 before paring gains. The yield on the 10-year slid by 10 basis points while the yield on the two-year bond screeched 14 basis points lower as investors quickly priced out inflation-scotching interest rate hikes. During the first two days of the week, investors have propelled short sterling futures 25 basis points or one-quarter of one-percent higher eradicating exactly one dose of policy prescription off shorter yields.

European bond markets – The warning contained within the IMF’s World Economic Outlook over the clear need for Eurozone governments to perfect a plan to contain spillover from future sovereign debt issues has reminded investors that the horizon remains clear until fresh storm clouds gather. German bund prices advanced as investors quit buying equities and sought the safety of fixed income. The March contract added 16 ticks to 124.07 lowering the yield to 3.10%. Elsewhere the Spanish Finance Minister failed to convince investors that €20 billion would be sufficient to recapitalize the nation’s banks and that most if not all of the funds could be raised through the capital market. Independent analysts had priced the recapitalization at four-times that amount, which must be causing some skepticism in Tuesday’s trading. Spanish government bond prices are lower causing yields to gain six basis points despite successful bond auctions today.

Japanese bonds – The Bank of Japan expanded its GDP forecast for fiscal 2010 growth through March 31 to 3.3% from 2.1% at its monthly meeting today and said that consumer prices would also rise by more than forecast. Demand for the safety of fixed income also faded as follow-through buying of stocks in response to gains in the U.S. session inspired buying in Tokyo. The March JGB future lost 15 pips to 139.46 to yield 1.24%.

Australian bills – An insipid showing for consumer prices in the final quarter of the year was enough to rally government bonds sending the 10-year yield sliding by seven basis points to 5.53%. Consumer prices fell short of forecast gaining 0.4% in the three months through December for a 2.7% annual pace of increase. Shorter-dated bill prices rose sending yields tumbling across the curve by a similar seven basis points.

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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