Global bonds are having a bad day heading into a three-day U.S. weekend after an ECB executive member warned Bloomberg news over the threat of rising prices. The prospect of rising interest rates spooked the front end of the German curve sending yields into a tailspin. Conversely a curious assessment from Japanese monetary policymakers weighed on yields in Japan as they questioned exuberance towards the recovering economy of the United States.
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European bond markets – An earlier jump in the German reading for producer prices in January barely dulled appetite for German government debt. Prices faced by producers rose at twice the expected pace at 1.2% causing an acceleration in the annual rate of change to 5.7% and perfectly set the stage for a warning from an executive governing member at the ECB. Lorenzo Binhi Smaghi told Bloomberg in an interview that “the degree of monetary accommodation has to be monitored and, if needed, corrected.” Two year German paper slumped given its sensitivity to potential changes in monetary policy causing yields to surge by eight basis points. The March bund contract unwound all of its gains made the prior day sending it to a loss of 37 pips to 123.36 to yield 3.22% for a session increase of five pips. Earlier in the day, Portuguese government yields rose to within five basis points of its highest since inception in 1999. Helping turn events around was the rumor that the ECB had bought paper directly from the interbank market and propping prices in the process. We must now await follow-up comments from Bini Smaghi’s classmates, which one must expect will dumb down his Friday warning.
Eurodollar futures – Eurodollars have also declined following the Bini Smaghi comments, which are weighing heavily on investors’ minds after this week saw enthusiasm for debt rebound. March note futures are lower by 10 ticks to 118-22 to yield 3.62% while Eurodollar contracts have slipped by around six basis points. There is no economic data on today’s calendar.
British gilts – Benchmark yields in Britain rose by three basis points on Friday after an unexpectedly robust reading for January retail sales. The market has it in its head that the bank of England will have no choice but to go with the flow and raise interest rates to defend against inflationary pressures. The Bank this week maintained its angle that those pressures will subside and inflation will return to base on its own. Gilt futures are lower by 22 pips in the March contract lifting the 10-year yield by three basis points to 3.78%. Short sterling unwound post-inflation report ebullience and dipped by seven basis points along the strip.
Japanese bonds –Japanese monetary policy makers expressed caution towards the ebullient attitude among investors over the glowing health of the U.S. economy. In minutes of its January meeting Bank of Japan officials noted that despite the appearance of better health, the economy had some way to go. Given the U.S. “economy continued to be burdened with balance-sheet adjustments, the prevailing view among market participants about the economic outlook might be somewhat too optimistic.” The caution helped lift sentiment towards domestic government bonds sinking yields by three basis points to 1.295%.
Canadian bills – Bond prices are marginally lower this morning more in sympathy to events elsewhere than at home. The January cost of living rose by 0.3% and weakened the annual pace of change to 2.3% from 2.4% in December. The Bank of Canada’s core and preferred measure was unchanged leaving prices 1.4% higher than a year ago. The rate is well below the 2% ceiling faced by the central bank raising the appeal of domestic bonds relative to elsewhere. The 10-year benchmark remained unchanged at 3.48% with the premium paid by U.S. investors widening to 14 basis points.
Australian bills – Aussie government bond prices eased sending yields two basis points higher. The Chinese central bank late in the day announced a further 50 basis point increase in its reserve ratio requirement sending yet another indication that it’s not yet done with tightening its monetary policy. The news came too late in the session to impact shorter-dated bill prices, which were static to end the week.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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