IB Interest Rate Brief: Mixed bag for bond opening
Bond markets are mixed around the world as investors attempt to get a better handle on the impact of spreading Middle Eastern unrest on the price of oil. Fears of a resultant slump in global growth have been calmed, but given the lack of clarity on quite how long prices might remain elevated there have been no major signs of selling by bond holders. The week is marked by likely conflicting evidence from heads at the Fed and the ECB where one is likely to focus on employment and the other on the prospects for inflation.
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Eurodollar futures – Bond managers fine-tuned portfolio duration at the end of the month keeping longer-dated bonds in demand, which in turn kept yields close to the lowest in a month. Even a strong reading for the Chicago manufacturing PMI failed to weigh on note yields with the note futures market maintain a stiff upper lip after the data. The March note traded recently at 120-11 and only five ticks from the session high to yield 3.41%. Speaking on CNBC earlier, St. Louis Fed Chief James Bullard dismissed the impact of a spike in the price of crude oil to a 29-month high claiming that the move would need to be further and on a more sustained basis before it would impact growth. He also noted that the economic picture for the United States during 2011 appeared brighter. Some of the bid behind treasuries on Monday came following income and expenditure data in an earlier report. Personal spending rose 0.2% in January and follows an increase the previous month of 0.5%. The December measure was also revised lower. Meanwhile incomes, which were expected to gain by 0.4% rose by more than twice as much at 1.0% leaving economists with the impression that a concerned consumer continues to focus on repaying debt rather than spending. Eurodollar futures made minor gains along the strip.
European bond markets –German yields rose as Finance Minister Wolfgang Schaeuble warned that his nation was not in the mood for compromising with highly indebted countries which had chosen to ignore previously agreed upon debt limits. Despite rising crude oil prices and the plausible impact on growth following a brisk economic expansion within the heartland of the Eurozone, bond investors rethought the prospects of last week’s oil price spike and decided that the risks to yields were likely on the upside heading into a policy meeting in Frankfurt on Thursday. March bunds fell 27 ticks to 124.05 sending the yield up two basis points to 3.16%. Earlier in the day EU CPI numbers were marginally better than forecast at 2.3% year-on-year, but still the highest in three years. Investors are wary that the ECB will use this week’s meeting to prepare the groundwork for rate rises later in 2010.
British gilts – Gilt prices rose with the March future gaining to 118.00 despite no fresh economic news. Investors remain concerned over stubbornly firm inflation data in Britain but chose to buy gilts on Monday as a rising exchange rate offers an alternative tailwind to the Monetary Policy Committee, which is struggling to command respect given the public disagreements among its members. Implied yields on short sterling futures were steady at the front end of the curve.