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.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis
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.
Japanese bonds – Stock prices rebounded in the region turning session losses into gains and helping divert bond yields away from three week lows. The March JGB contract ended the session with a loss of seven ticks at 139.52 having rejected an advance earlier to 139.76. The yield on the 10-year added one basis point to 1.245% as traders held back demand ahead of an auction of fresh bonds later in the week.
Canadian bills – A surge in the Canadian dollar in response to a sharper gain for December GDP helped drive government bond yields higher and maintained nearby pressure on the Bank of Canada to rein in demand. An 11-tick decline in the March government bond futures contract saw the yield gain one basis point to 1.30% narrowing the premium paid by U.S. investors at the same maturity to 11 basis points. Short-dated bills of acceptance fell sharply following the GDP reading, which was almost twice as strong as expected. The June, September and December contracts are approximately 25 basis points in yield apart and imply the Bank of Canada will double the current policy from 1% to 2% by year end.
Australian bills – Australian government bond yields eased to 5.50% after Chinese Premier Wen Jiabao set a mildly weaker annual growth rate for the next phase of the nation’s five-year plan. Australia relies heavily on import demand for its raw materials and news that it plans a less expansive policy target weighed to a degree on the outlook for Australia. Shorter-dated bill prices were quiet following a report from TD Securities showing a decline in the monthly inflation rate leaving the year-on-year growth rate at 3.6%.
Senior Market Analyst
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.