A surge in manufacturing activity in the Philadelphia region threatened a rebound for benchmark treasuries on Thursday. Minutes from the Federal Reserve’s latest meeting showed disappointment in the pace and breadth of the recovering labor market and earlier provided relief for investors wary of creeping living costs. Bond yields have fallen around the globe on Thursday as investors conclude that central bankers are increasingly likely to watch commodity prices respond to the recovery process without adjusting monetary policy.
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Eurodollar futures – The Philly Fed manufacturing index skyrocketed to 35.9 to indicate the strongest level of regional activity since January 2004. The benchmark 10-year yield rose after reaching its lowest in two weeks with the March future breaching 119-00 for the first time since February 4. Earlier in the day the consumer price index showed a modest increase in the monthly cost of living and soothed fears that rising commodity costs were filtering through to the bottom line. The FOMC was happy about the recovery but disenchanted by the performance of the labor market, which it predicts will take five or six years to build up a head of steam. Despite the Philly Fed index blasting beyond the most outrageous forecast by any economist today, Eurodollar futures and treasury prices remain in buoyant mood. The far-dated futures have seen implied yields decline by more than 10 basis points along the strip with the 10-year note currently yielding 2.57%.
British gilts – Gilt futures also remained in buoyant mood a day after the Bank of England attempted once again to burn the notion that it will need to respond to little more than temporary inflationary pressures. Short sterling prices rose for a second day with implied yields declining by a further six or more basis points, the March gilt contract added 56 ticks to 116.46 to yield 3.76% buoyed further by falling treasury yields. A CBI trade report for February showed strength in export orders that where foreign demand increased to its highest in 16 years. Meanwhile a separate index within the report showed price expectations among respondents at the highest in three years.
Japanese bonds – The recent rise in U.S. yields has impacted the Japanese market, where economic recovery is also taking a toll on bond prices. In both nations yields have lately matched 10-month highs, but bond buyers doubting a straight-line improvement in the behavior of the U.S. recovery stepped in on Thursday after the FOMC minutes. An 11 tick gain for March JGBs saw yields dip by two pips to close at 1.32%.
Canadian bills – Canadian government bond futures remain close to a session peak trading at 119.75 to yield 3.46%. U.S. yields are now chasing Canadian yields lower with the spread today narrowing to just about 10 basis points as inflation-doubters tread back in to U.S. notes. A report earlier showing wholesale sales for December rose 0.8% and just under forecast helped spur demand for fixed income. Canadian bill prices also rose but lagged the Eurodollar performance managing less than half of the gains seen in Chicago.
European bond markets – German bund prices have surged and appear to be taking a queue from the improving mood in American markets. Yesterday’s ECB comments underpinned bond prices with another member of the governing council warning that inflation would likely return to track in the second half. March bund prices escalated into the European afternoon and last trade at 123.77 for a 70 tick jump on the day. The 10-year yield collapsed by five basis points to 3.19%.
Australian bills – Despite central banker Philip Lowe’s warning that higher commodity costs might remain on the horizon for what he called “an extended period,” bond yields slid by four points and shorter-dated bill prices shed two or three basis points as investors responded to the implications arising from the lead offered at the Fed’s meeting.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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