Bonds rally overnight

IB Interest Rate Brief: Yields mixed as investors weigh stocks and crude oil

Treasuries best performance since the last day of January came in the middle of the North American night as investors in Asia sold stocks and reached for the safe haven of government debt. As events unfolded in early morning Manhattan signs of economic strength pared gains for safe haven investments as investors once again rotate cautiously from bonds to stocks.

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Eurodollar futures – The March 10-year note future reached 120-23 overnight sending yields to the lowest since Jan. 31. In Asia equity prices were sinking in response to a sharp drop in U.S. equity values on Tuesday as crude oil soared and as protests turned uglier in the Middle East. A fear that the crisis has further to run remains a threat for market bulls. Just two days ahead of the latest non-farm payroll report, which should be less dampened by weather-related concerns for February, private payroll processor ADP estimated that private employment grew by 217,000 last month. Following the release of that report the note future sank to its low of the day at 120-03 lifting the yield on the session to its current 3.43%. Eurodollar futures remain in the black but are little changed.

Canadian bills – Bill prices are a little lower today in price terms, but was the only short end making gains following yesterday’s decision by the central bank to maintain interest rates at 1%. Implied yields have therefore only taken back some of the prior day’s gains. The yield spread between the U.S. and Canada continues to widen and reached 14 basis points as rising domestic yields lag the bigger move in the U.S. midweek.

British gilts – There is a curiously soft tone to British credit markets despite an unexpected improvement in the health of the construction data according to today’s PMI report. Activity rebounded at a time when it had been expected to stagnate with the diffusion index rising to 56.5 from 53.7 in January when bitter weather hampered activity. Short sterling futures reflect marginally lower implied yields with that on the December 2011 expiration easing by two basis points to 1.58% this morning. The March gilt contract is also well bid and is bucking the global trend towards higher rates evident midweek. The March contract is currently eight ticks higher to stand at 117.76 yielding 3.62%.

European bond markets – March bunds spent the earlier part of the session much higher on the day reaching 124.49 ahead of a jolt served up by a January producer price reading almost twice as high as was expected. The 1.5% monthly rise in costs faced by producers in the 16-nation EU caused the annual pace of increase to accelerate to 6.1%. On Thursday the ECB convenes to discuss its current monetary policy stance with many investors concerned that recent hawkish commentary will result in a shift in rhetoric leading to an eventual removal of its loose policy stance. The short end of the German yield curve has risen lately with the two-year note near to an 18-month high while the 10-year bund stands today at 3.19%.

Japanese bonds – Japanese yields fell by five basis points to 1.255% overnight in the thick of a meltdown for stock indices across the region. The Nikkei 225 slid by 2.4% to its worst performance since the end of August 2010. There was little domestic news to influence demand, which rose after protests in Iran led to clashes with authorities and the Libyan crisis worsened.

Australian bills – Aussie 90-day bill prices made minor gains as implied yields eased in response to comments from Treasurer Swan who said that first quarter GDP would be weakened by 0.25% in light of the floods and a cyclone that hit the nation in February. Government bonds were also in demand as a safe-haven venue in the wake of a 1.5% decline in the MSCI Asia Pacific benchmark index. The 10-year yield eased by three basis points to 5.50%.

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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