Yields rise as bonds see quiet start

Global bonds are a little weaker in early trading despite signs of a lackluster start for North American equity trading. Bonds rose earlier as the single European currency fell sharply over signs that at the start of a two-day meeting among the region’s finance ministers, divisions remain deeper-seated than many onlookers had convinced themselves.

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Eurodollar futures – Eurodollar futures have subsequently come off a stronger start that saw implied yields ease by a couple of basis points along the strip. S&P 500 index futures have been in the red overnight but so far indicate only mild losses for equity prices. Many onlookers believe that the spreading steps towards democracy in the Middle East represent a positive move for global markets with one investment banker calling the overthrow at the top of Egypt as a “Berlin Wall moment.” Asian stocks rallied to begin the week leading to a sensation of risk-on, before European woes came to the fore, which helped lift March treasury futures to an intraday peak at 118-20. However, later selling reversed the rally with the contract losing four ticks to 118-12 yielding 3.66%.

European bond markets – All is not well in European markets just as finance officials meet in Brussels. Hopes are shattering that the leaders have any sort of agreeable plan to keep deficit reduction plans intact. There are additional grumblings surfacing from individual nations over the path that bailouts have taken them. Greece now claims it’s unhappy with commands to sell off its family silverware to raise €50 billion in order to reduce its deficit. Ireland’s opposition party is also asking for renegotiation to put senior bondholders on the hook to share in the nation’s losses, while Italy isn’t happy about having annual debt-reduction targets imposed. In all, the picture is getting uglier and uglier in Europe. Investors made a beeline for the safety of German bunds at first only to find that bonds were losing favor with investors, altogether sending yields higher across the board. Nevertheless spreads between safer German paper and peripherals widened significantly. Greek and Portuguese yields faced double-digit increases by midway through the European session.

British gilts – There is little activity in short sterling prices to report. The strip is now lower in price (higher in yield) after a positive start while March gilt futures have also backed away from a positive stride into the black. The contract recently traded lower by 15 ticks at 115.56.

Japanese bonds – Japanese debt moved little ahead of Tuesday’s central bank meeting. The Nikkei newspaper said that the Bank of Japan would boost its assessment over the health of the Japanese economy at this week’s meeting for the first time in nine months, although didn’t cite any source. Investors were hardly discouraged by Monday’s GDP report for the fourth quarter, which showed a lesser pace of contraction than was baked in. The economy contracted at an annualized pace of 1.1% compared to a forecast reading of 2.0%. Expectations ahead are for better things amid a boom in surrounding Asian economies. The yield on the benchmark one-year government bond remained unchanged at 1.30% as March JGB futures made gains of just four ticks to 138.86.

Canadian bills – Canadian government bond yields are sticking closely to the script and largely tracking the performance of U.S. treasuries. The spread between the two 10-year government bonds has narrowed further to just 17 basis points this morning as demand amongst investors for U.S. debt recovered after the Treasury sold more bonds last week. Shorter-dated Canadian bills have fallen by two pips in early trading.

Australian bills – Australian credit markets responded in Pavlovian fashion to a data report showing that home loans rose strongly in December at the same time as banks lent more to companies for investment purposes. The 90-day bill strip eased back after making gains late last week with the strip giving up two basis points. The yield on the benchmark government bond rose by four pips to close at 5.70%.

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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