Bonds continue to trade on the soft side ahead of U.S. auctions this week and as yields prod the upside in fear of monetary tightening. Not helping matters today is another remedial interest rate increase from the Chinese authorities.
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Eurodollar futures – The U.S. will auction $72 billion throughout this week across the term horizon. In anticipation of increased supply yields are creeping higher. Small business optimism rose during January marginally outpacing a forecast with a 94.1 index reading after 92.6 last time around. March treasury futures are marginally lower on the session after the data having rallied to 118-23 earlier in the day. Eurodollar futures have shed a further three basis points as investors keep one eye firmly fixed in the steadily rising stock market. Overnight Dallas Fed President Richard Fisher said that beyond the second wave of the FOMC’s quantitative easing process he would argue against additional stimulus. The two-year Treasury note yields close to an eight-month high while the 10-year at 3.66% is up three basis points on the session and close a nine-month high.
European bond markets – An earlier report showing unexpected factory output in German during December provided a green light for bund buyers who propelled the contract to a session peak at 123.12. However, comments from ECB member Yves Mersch continue to resonate. He said that rising energy and commodity prices have put pressure on inflation but “are of a nature that is typically outside the influence of the central bank because their origin is external.” Mr. Mersch discussed the problem that such price pressures would create for the ECB should they persist in a second round fashion adding that the ECB would not hesitate to raise monetary policy. The warning sent two-year yields higher while the bund yield at 3.23% is currently one pip lower on the day.
British gilts – A RICS home price survey showed a marginally improved outlook for the housing market. Fewer surveyors reported declining price values while most said prices were unchanged and slightly more said prices were rising than one month ago. On balance the report is positive, but does serve to remind policy-makers that the market is a long way from supporting the British consumer. The Chancellor today announced he’d bring forward into the current fiscal year ending in April a bank tax citing the stability of the sector. So healthy is the banking system that the Chancellor expects to tap them for £800 million this year bringing the total tax take to £2.5 billion over the next couple of years. Conceivably a good piece of news for gilts, but in the big picture it won’t affect debt-issuance all that much. March gilts have surrendered a positive start to 116.20 and are almost unchanged on the day at 115.85 to yield 3.82%.
Canadian bills – Government bonds fell after a January report for housing starts came in at an annualized pace of 170,400 and only slightly short of forecast. Optimism over the health of Canada’s domestic economy has the money market expecting more monetary tightening at some point during the first half of 2011. The 10-year benchmark today yields 3.45% while bill prices are showing mild gains on the session.
Japanese bonds – A 0.4% gain for domestic stocks continued to sap demand for fixed income in Japan causing yields to reach a nine-month high. A weak 40-year auction, which was brought the weakest showing since the government introduced them in 2007, also underscored the poor environment for bonds. March JGBs sank to 138.85 for a 15 tick loss on the day sending yields higher to 1.31%.
Australian bills – Aussie government bonds yielding 5.73% look high enough to many investors keeping prices steady overnight despite the strongest reading of consumer confidence in four years. Bill prices also recovered marginally from recent losses.
Andrew Wilkinson is a Senior Market Analyst at interactive Brokers LLC
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