Bonds rally on Middle East uncertainty

IB Interest Rate Brief: Bonds rally as protesters take the night boat to Cairo

Yields are lower across the world as a weekend of uncertainty inspired a bid behind government bonds. Demand for the safety of bonds dovetailed with demand for dollars as investors took no chances with global equities continuing to look expensive in light of rising Middle Eastern tensions following the retrenchment of Egyptian leader Mubarak. On Thursday his people were in buoyant mood ahead of a scheduled speech from the President. By Friday the mood has soured after an apparent concession to the influential Egyptian army left them siding with Mubarak’s timeless concession plans.

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Eurodollar futures – The U.S. Treasury was busy selling bonds along the maturity horizon throughout this week, a move which was partially responsible for causing yields to rise from last week’s close at 3.63% at the 10-year note to a midweek peak of 3.77%. However, the New York Fe will be buying $6-$8 billion in maturities ranging between five and seven years on Friday. Treasury prices jumped on Thursday and felt a further bid to end the week on rising tensions from Egypt. The March contract reached a high of 118-22 to yield 3.64% almost completely eradicating the weekly loss. The market ignored a widening trade deficit on account of increasing crude oil costs and must face the Michigan consumer confidence survey later this morning. The survey is predicted to show confidence escalating to a seven-month peak. Eurodollar futures also made gains as implied yields slid by seven basis points.

European bond markets – March bunds remain in a two-week downtrend with clear overhead resistance keeping a lid on today’s gain to 122.96, although the contract is rather close to taking out Thursday’s high and a move ahead in late trading could see substantial gains open up ahead of the weekend. Euribor contracts also made gains of several basis points sending implied yields lower despite a rise in German CPI to an annual 2% pace.

British gilts – The March gilt future put in a very strong performance earlier to reach 115.98 before paring gains to 115.86 leaving the contract higher by 47 ticks on the day. Yields declined after former MPC external member Kate Barker warned that inflation-damping interest increases could tip the recovery efforts into a tailspin. Short sterling futures also rose by four basis points as traders softened their stance on future monetary belt tightening. The benchmark government bond yield slid by five basis points to 3.83%.

Japanese bonds – Japanese government prices responded to the rising Middle East tensions with a 35 tick advance overnight as buyers helped lower the 10-year yield by three basis points.

Canadian bills – Canadian bonds stand out from the crowd on account of the health of the domestic fiscal position. December’s headline-grabbing trade report showed that exports of energy and industrial goods led the economy to a trade surplus for the first time since last February. Exports jumped to C$37.8 billion in the final month of the year growing at the fastest monthly pace in 29 years. At the same time industrial sales abroad, including metals, surged to the highest ever. The improving economic news made Canadian debt stand out once again and helped power a strong showing for government bonds where yields fell by four basis points to 3.42%. Bond futures rose to a session high at 120.01.

Australian bills – Bill prices added to earlier in the week gains after Reserve Governor Stevens told a parliamentary committee that monetary conditions were on “the firm side” and that it made sense recently to take no further actions on monetary policy. Government bonds also rose shaving two basis points off the 10-year yield. The implied three-month cash yield on the March 2012 bill contract slipped nine basis points to close the week at 5.43%. Just three sessions ago the contract implied a yield of 5.64%.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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