Bond dealers have to reconcile conflicting factors on Thursday as government paper prices gyrate. Earlier in the session equity index futures pointed to a further lurch lower at the start of trading on account of a nasty concoction of events in Tripoli as Colonel Qaddafi struggles to maintain a grip over Libyans. The resultant triple-digit price of crude oil, powered higher by speculative concerns that supplies will be reduced, has mounting growth concerns around the world. Bond buyers haven’t been in short supply as a result. Equity index futures later rebounded on a revival in U.S. employment fortunes. But that probably isn’t likely to remain as powerful a force ahead if crude oil clings to its current outrageous price.
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Eurodollar futures – Treasury futures reversed course following a 22,000 decline in initial claims through last weekend and a report showing orders for goods meant to last for more than two-years rose almost in-line with expectations. Durable goods orders ex-transportation fell by 3.6%. The March 10-year future earlier reached 120-11 sending the benchmark yield down to 3.43% ahead of Thursday’s data. Later the contract pared gains to reach 120-00. Despite the historic data the forward-looking picture continues to provide support for government bonds in light of rising Middle East tensions and the ramifications yet to be felt of a surge in the value of crude oil. Eurodollars had made price gains earlier of around eight basis points as fears for global growth mounted.
European bond markets – Euribor prices rebounded from earlier in the week losses as investors continued to respond to the unfolding crisis in Libya. Implied three-month cash yields eased by three or four basis points at maturities at least seven months forward and beyond. The optimism in credit markets even upstaged a report showing an index of economic optimism across the Eurozone had risen to a three-and-a-half year peak. Government paper prices continued to rise as investors’ appetite for equity prices weakened further. The March German bund contract jumped by 32 ticks to a session high earlier at 124.60 to yield the lowest in almost a month at 3.12%. However, yields in peripheral Europe rose as threats to growth from a surge in the price of oil emerged. While German yields slipped by two basis points, those in Spain and Italy rose by four basis points while those in Greece added seven basis points.
British gilts – A slide in optimism amongst retailers and a caution from a central banker over the urgency to tighten monetary policy provided fertile ground for short sterling bulls as risks to global growth advances. Short sterling futures rose by up to nine ticks at deferred maturities as investors responded to a speech delivered by david Miles of the MPC, who last week voted to maintain policy as is. Mr. Miles agreed that inflation at 4% appeared “deeply worrying” but reminded his audience that the cause was not loose monetary policy but revenue-raising tax measures and rallying commodity prices. Meanwhile his observation that growth risks to the Bank’s central forecast were skewed to the downside are finding further tailwinds in the form of $100-a-barrel crude oil. March gilt futures added half-a point to 117.76.
Japanese bonds – A stronger yen and an ongoing bout of stock market weakness spurred demand for the safety of government bonds on Thursday. The 10-year yield fell to 1.22% and its lowest since February 2. March JGB futures rose 22 ticks to close at 139.92.
Canadian bills – Short-dated bill prices in Canada can’t quite match the more optimistic tone in the U.S. even as investors have a firm gaze on the threat to growth from stiffening oil prices. Bill prices are trading unchanged while the decline in government bond prices is insulated from the reversal in treasury prices this morning brought about by robust durable goods and initial claims data. The three-pip increase in Canadian yields is less than that on treasuries forcing a wider premium of 15 pips to be paid by U.S. investors.
Australian bills – Despite the rising tensions in the Middle East Aussie bill prices and government paper prices fell at the margin causing a mild increase in borrowing costs. Culprits were a stronger domestic dollar and a report that showed a record amount of capital investment among Australian businesses during the last quarter of the year. Local businesses especially mining companies spent a record A$29.7 billion in capital expenditures in the three months ending in December as escalating demand for raw materials from China and India puts pressure on capacity. The benchmark Aussie 10-year yield nudged higher to 5.55%.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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