Bonds higher on miserable durable goods data

Bond yields remain range bound with investors eyeing improving data and rising risk appetite on the one hand yet listening intently to the confused messages from central bankers on the other. Each wave of rising yields seems to be met by a weak economic report while bankers keep changing their tone forcing yields to keep on swinging.

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Eurodollar futures – Treasury notes were lower in price ahead of key economic data on Thursday only to turn higher. Initial weekly jobless claims data surprised with a weekly jump of 51,000 to 454,000. That report came the day after the FOMC repeated its stance that overall unemployment was unlikely to decline at the current pace of economic activity saying that they would proceed as planned with their policy of buying bonds in the open market. Yields crept higher but following the latest piece of the puzzle and fresh evidence of a patchy recovery, bonds advanced sending yields lower. A durable goods report for December was the latest negative surprise. Typically a volatile report, the market had predicted an increase in orders of 1.4% for goods meant to last for more than two years. In the event orders declined by 2.5%. March note futures reversed losses and traded up to 120-16 to yield 3.41%. Meanwhile Eurodollar futures prices are higher by two pips at session highs after earlier stalling and trading down three pips at the day’s lows.

Canadian bills – Following the lead of the U.S. fixed income market, short-dated bills of acceptance are a couple of ticks higher across the strip as investors temper expectations of imminent interest rate increases. Nevertheless, government bond yields rose by one tick to 3.31% maintaining a 10-basis point yield deficit below comparable U.S. notes. The March bond future slipped 14 ticks to 120.76.

British gilts – Gilts are well off the session low at 116.69 but remain lower on the day as investors continue to wrestle with the prospect of a monetary tightening. The 10-year yield rose to 3.70% as the March gilt contract fell to 116.91. Investors worry that bulging inflation might yet spill over into rising wage agreements that might force the Bank of England to act. Already the Bank has warned that it’s not ready to do so given the likelihood that price pressure will subside in the medium-term. Short sterling prices gave up some midweek gains with contracts slipping four basis points.

European bond markets – The German market was unable to maintain American-inspired gains in response to a fresh serving of weaker data. Tough talk on rising import prices from ECB member Lorenzo Bini Smaghi also kept bond buyers at bay as he warned that inflationary pressures on account of rising commodity prices cannot be ignored. The March bund contract remains close to its session low of 123.24 having earlier reached 123.79. Euribor contracts too are pointing to higher implied yields with contracts suffering at the hands of sellers who have added five basis points on to yields.

Japanese bonds – The insular nature of the Japanese bond market meant that an earlier S&P credit ratings downgrading of Japan’s long-term sovereign credit rating didn’t cause yields to flare up. Unlike other developed bond markets where foreign holders hold sizeable stakes in terms of bond holdings, the same can’t be said of Japan where domestic investors form the lion’s share. March futures were static overnight keeping yields at 1.215%.

Australian bills – Buyers loaded up on 90-day contracts sending implied yields five ticks lower after Prime Minister Julia Gillard announced the introduction of a 12-month income tax in an effort to raise A$1.8 billion to help pay for cleaning up after the Queensland flooding. The tax increase will possibly deter any further tightening ambitions from the central bank. The 10-year yield eased three basis points to close at 5.53% in response.

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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