Bonds steady despite some healthy signs

Government bond prices remain firm and have reversed earlier losses. It’s all too easy to pin a decline on yields on rising fears surrounding the uprising across Egypt. Perhaps investors are starting to better understand the threat of rising commodity prices as signs of temporary pockets of strength, which might ultimately keep at bay the threat of monetary tightening.

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Eurodollar futures – With demand for U.S. equities back in the spotlight following a weekend of intense media focus on North African politics, there seems less reason to run for the safety of government bonds. Yet that tendency emerged even after unexpectedly robust data in the shape of a Chicago purchasing managers survey that showed further strong expansion rather than a modest pullback in the pace of activity. The index rose to 68.8 in January building on a measure of 66.8 in December, while forecasters had predicted the expansion to decay somewhat to 64.5. The data seemed to coincide with a decline for bond yields following stronger than forecast expenditure data. December income data rose 0.4% on the month and in-line with expectations, while spending was far more robust and came in at more than twice a downwardly revised November pace when spending grew by 0.3%. Today’s data showed consumers spent 0.7% more in December. March notes have since risen reaching a session high at 121-14 and yield 3.33%. Eurodollar futures have also made minor price gains.

Canadian bills – Government bond prices north of the border have pared an earlier gain following news that the economy expanded in November at its fastest pace since last March at a rate of 0.4%. Rising oil production, retail and wholesale activity drove growth leaving the economy 3% ahead on a year ago basis. March bond futures touched a session high at 121.57 before turning to a loss on the day last trading at 121.44 to yield 3.24%.

British gilts – Short sterling interest rate futures slipped following a weekend article penned by Martin Weale who sits on the Bank of England’s Monetary Policy Committee. He voted two weeks ago for an immediate interest rate increase and laid out his arguments in the Guardian newspaper as to why he believes inflationary pressures justify a modest increase in interest rates. March gilts saw yields at the 10-year rise by a couple of basis points ahead of a powerful rally that erased losses to 117.03 with the contract subsequently attempting to take on the opening high at 117.45. Gilts currently yield 3.65% even as implied yields on short-dated contracts rise by up to five basis points.

European bond markets – Euribor contracts have erased earlier inflation-inspired losses following a report showing that consumer price pressures rose by 2.4% year-over-year for the fastest pace since October 2008. Three-month contracts fell by five basis points in the aftermath of the data series, which scared traders into accelerating a scenario that has the ECB lifting monetary policy sooner rather than later. The bank meets this Thursday to discuss its policy settings. However, while price pressures are plain enough, many onloookers pin the outcome on temporary spikes in food and energy factors. Retail sales data for Germany showed that despite leading the charge out of recession, German retailing activity in December slackened off showing a 0.3% monthly decline leaving retailers 1.3% down on a year-over-year basis. March bunds fought back against an early slide to 123.55 to trade flat on the day at 123.73 yielding 3.14%. Peripheral bonds rallied sending yields on Spanish, Italian and Greek debt lower.

Japanese bonds – Yields edged lower despite a set of strong Japanese economic statistics on account of fears that Egyptian riots might spill over across the Arab region causing further global economic instability. The March JGB futures contract nudged higher sending yields on the 10-year government bond lower to 1.20%. Bond prices pared earlier gains in response to a rise in a manufacturing diffusion index indicating that activity across the sector returned to expansive territory this month. Housing starts and construction orders for December also displayed healthy performances.

Australian bills – The RBA also meets this week but is expected to discuss the economic ramifications from earlier flooding to Queensland rather than thinking about meddling with monetary policy. Price spikes have been predicted in the aftermath of crop-ruin and the first measure of this was evident in a jump in a private reading of inflation. The TD Securities inflation index for January showed a 0.4% monthly gain and twice that of December. On a yearly basis prices were 3.4% higher although lower than the 3.8% measured in December. Short-dated bill prices dipped by a tick while 10-year bond yields rose by as much as five basis points to settle at 5.50%.

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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