Bond markets shrugged off early morning weakness reminiscent of that morning-after feeling. The 13 basis point slide in the benchmark treasury yield on Tuesday was the largest in eight months and investors were quick to bank profits on Wednesday wondering whether the move was simply too much in response to heightened geopolitical worries. But as the price of crude oil escalated to a two-year high, it served to undermine a similar morning-after rebound for equities which saw the S&P 500 index reverse a five-point pre-market gain. Bond prices in the major global markets have subsequently raised the roof by extending Tuesday’s price gains sending yields further down.
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Eurodollar futures –U.S. government debt remained in high demand even ahead of a further pair of auctions bringing $35 billion in additional supply to the market. Yields have barely been conditioned in advance – a feature that allows dealers to sell out of old bonds in preparation for the new debt load, which typically serves up instant profits post auction. Today U.S. 10-year futures have rebounded from a buying reprieve and touched 119-24 in the March contract before a reversal of equity index futures instilled an advance in fixed income to 120-05 to breach Tuesday’s best price. Eurodollar futures have also reversed European inspired monetary tightening worries and have resumed an advance to seven basis points above earlier session lows.
European bond markets – European leaders continue to battle with resolving a deepening deficit crisis before ancillary problems conspire to suffocate the economic area under the weight of its rising debt. At the same time accelerating inflationary pressures have stiffened the urgency among some monetary policy makers to a regime of ultra-low interest rates. Yet at the same time raising interest rates would likely be felt around the periphery like a cosh to the back of the head. There are growing expectations that next week's statement will be used by the ECB to shift its rhetoric into a higher gear when the governing council meets. The added fear factor to the market has fuelled a flattening of the German yield curve with two-year yields rising sharply towards the highest in almost a year, while the 10-year bund benefitting from the fear instilled by Libyan tensions. The curve flattened to a four-month low today at 149 basis points.
British gilts – If you take the nation’s 4% headline rate of inflation and strip out the impact of recent deficit-reducing tax measures and estimate by how much the commodity upswing has swollen the data, you’d possibly arrive at the conclusion that the Bank of England could be patient with making growth-altering adjustments to monetary policy. De facto, you’d be right since the Bank hasn’t adjusted its policy setting despite a growing chorus of impatient onlookers. But de jure, you might just be wrong judging by the switch to the hawkish camp by the Bank’s economist Spencer Dale who recently argued for an increase of 25 basis points on the Bank’s base rate borrowing cost. In the MPC minutes published midweek several members noted that upside risks to inflation had increased. Interest rate markets continued to push the normative argument following the assessment and after leading dissenter Andrew Sentence raised the stakes by arguing for a half-percentage point increase in rates. Nevertheless, short sterling futures have rejected earlier session lows. The March 2012 contract earlier implied a cash rate of 2.11% before fears subsided somewhat with the yield slipping to 2.04% in afternoon trading. March gilts have also turned around in late trading following a negative response to the MPC minutes. The contract earlier touched 116.84 before bursting through Tuesday’s high to reach 117.38 to yield 3.66%.
Japanese bonds – Japanese bond investors continued to rally with the March contract closing 26 ticks higher at 139.66 sending the yield two basis points lower to 1.24%. With 95% of bond holders domestic investors couldn’t care less about the recent brace of downgrades from either Moody’s or S&P. Buyers were bulled by ongoing fears emanating from the Middle East, which maintained a downside appeal for regional stocks.
Canadian bills – Bill prices are mixed with forward cash yields trading both sides of unchanged in Canada as investors keep one eye on geopolitical risk and the other on inflationary concerns emanating within Europe. Government bond prices rose shaving three pips off the 10-year yield to 3.32%.
Australian bills – Aussie government bond prices made minor gains, enough to send the 10-year yield lower by one basis point. Bill prices ended in the red but lifted implied yields only by one basis point.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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