Treasuries on defensive

IB Interest Rate Brief: Bernanke prepared to act, but sees inflation as temporary

A strong bout of data meant bond traders were on the defensive on Tuesday with yields also pivoting around the price of crude oil, which in New York is once again pressing on the triple-digit mark. Yields are generally firmer in response to a series of purchasing managers’ surveys indicative of yet healthy recovery. A jump in the price of oil mid-morning coupled with a calm tone from the Chairman of the Federal Reserve later helped improve the bid behind treasuries while equity prices responded by reversing sharply.

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Eurodollar futures – Yields were under pressure following a series of manufacturing reports from east to west that indicated global manufacturing remains in good shape. The February ISM manufacturing report showed the healthiest state for the sector since 2004 rising to 61.4. Ahead of that report treasury futures slipped by a half-point lifting the yield by five basis points to 3.48%. Fed Chief Bernanke also addresses lawmakers this morning and will likely gloss over the recovery to labor his point that although welcome, it’s not an indentured recovery without an improvement in the health of employment activity. Dealers await the February non-farm employment report on Friday and expect to see 190,000 new positions created. Eurodollars were lower as implied yields stepped up around the world before Bernanke spoke.

Canadian bills – Short dated bills of acceptance bucked the global trend towards higher interest rates this morning following the Bank of Canada’s meeting statement at which it left its policy stance unchanged. The central bank also indicated that partially on account of a high exchange rate the decision to further adjust policy would need real justification. The Bank stated, “the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance.” Bill traders were caught short after the announcement with implied yields falling by two basis points. Government bond futures couldn’t escape the backdraft of weakness brought on by a global bond slide, although the rise in rates was less pronounced in Canada where the benchmark rate added three basis points to 3.32% widening the spread paid by U.S. investors to 16 basis points.

British gilts – Short sterling futures have recovered heavier losses sustained following an unexpected rise in home values according to the February reading of the Nationwide’s house price index. Investors braced for a further monthly dip were surprised to see a 0.2% decline for house prices rather than the actual 0.3% increase, which left prices year-on-year down by only 0.1%. Further dampening yield futures was a further robust PMI report from manufacturers. The sterling strip was nursing losses of six basis points in earlier trading but losses have been pared to almost unchanged on the day. March gilts remain depressed with the yield climbing by four pips to 3.63%.

European bond markets – March bunds are testing the lowest prices over a tumultuous week long stretch where investors bid up government paper as uncertain Middle Eastern events unfolded. The contract has rebounded from a session low at 123.79 to trade recently at 124.00 and yields 3.19%. The rate of unemployment across the Eurozone dipped to 9.9% in January while data from Germany showed a sharp recovery in its labor market in February with three-times as many positions filled as expected. Some 56,000 new workers began projects around the nation during the month. Bonds were also under pressure after an EU wide CPI reading showed that the cost of living remained above the ECB’s target coming in at an unchanged 2.4% last month.

Japanese bonds – Rising equity prices and the addition of 170,000 new jobs during January helped dim appetite for government bonds. The March JGB contract slipped overnight by 32 ticks to close at 139.22 shifting the yield on the benchmark 10-year to 1.26%. Bonds were also weaker following a report showing household spending continues to improve, albeit still in negative territory. The 1% dip in household spending during January was a smaller dip than forecasts and an improvement on the 3.3% decline in the previous month.

Australian bills – The Reserve Bank noted at its regular policy-setting meeting that the pace of inflation during the next 12 months would likely remain within its target range spanning 2-3% and as such felt no need to change monetary policy from its 4.75%. Indeed it described its current stance as “mildly restrictive.” Still, with equity prices firming around the world investors switched out of fixed coupons and into riskier propositions to drive the benchmark 10-year yield higher by three basis points to 5.53%. Bill prices also fell sending implied yields higher by as much as six basis points at deferred maturities.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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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