Bonds temper gains into the weekend as oil steadies

Fortunes for global bond prices remain mixed. OPEC’s promise to replace any oil shortfall created by a potential vacuum in Libyan oil output took pressure off investors’ appetite for government paper. Yields are generally higher to close a week of net lower yields.

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Eurodollar futures – A miss-on GDP report saw bond prices recover from earlier losses after state and local governments further reduced spending. Treasury futures expiring in March are trading at exactly 120-00 although remain trapped in a range spanning less than 10 ticks on the day. The GDP report showed the U.S. economy expanded half a percent less than forecast with annualized growth coming in at 2.8%. Stock prices have also recovered after two days of selling pressure for fear that a 14% surge in the price of oil during the week will crimp the recovery. Eurodollar futures are quiet, but marginally lower following today’s report and ahead of a University of Michigan consumer confidence reading later this morning.

European bond markets – The yield curve is unchanged overnight, although German bund prices have pared a weekly gain in which the 10-year yield slid nine basis points on fear of global recession. The March contract remains lower by 25 ticks to 124.16 after German CPI for February came in at 2.0% year-over-year pace. Despite missing the forecast pace of inflation by a hair’s breadth, the pace remains at the ECB’s target ceiling and dealers remain nervous ahead of next week’s policy meeting.

British gilts – Gilt prices remain towards a session high of 117.79 following a downwards revision to fourth quarter growth in the U.K. to show a 0.6% contraction at the time. Short sterling futures surged after the report with implied yields slumping by up to 10 basis points as dealers were forced to remove bearish bets. Bank of England policy committee member Andrew Sentence spoke late on Thursday urging the Bank to adopt a gradual tightening process. He noted that “the risk of delaying interest rate increases too long is that this gradual approach may cease to be an option in the future.” The implied yield on the year-end futures contract slipped to 1.61% and compares to the Bank’s benchmark rate of 0.5% and implies perhaps four one-quarter point adjustments to policy.

Japanese bonds – Government paper prices slipped as Japanese stocks rebounded by 0.7% and reports showed confidence in the battle against deflation. National consumer prices and those for the capital fell by less than forecast causing bond prices to give back some of the gains in four months for yields. The March JGB contract shed 23 ticks to 139.56 lifting the yield two basis points to 1.235%.

Canadian bills – A rise in the Canadian dollar caused by a spike in crude oil prices has made its way through to government bond prices, where the yield on the benchmark 10-year bond fell by two basis points widening the premium paid by investors in U.S. treasuries to 15 basis points to end the week. Bill prices fell by one pip and mirrored the performance of the Eurodollar curve.

Australian bills – Australian government bond yields caught up with declines elsewhere and closed the week at 5.53%. It was a data-free session for Australian markets leaving the pall of Middle Eastern unrest as the biggest influence over 90-day bill prices, where implied yields eased by three basis points.

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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