Euro bonds fall as Trichet pulls out the red pen

Canadian bills – What’s good for the U.S. is good for Canada, and so what’s bad for U.S. monetary policy is also bad for the outlook for that of Canada. Short-dated implied yields fared better but still rose by six basis points on Thursday following U.S. initial claims. The strengthening Canadian dollar is likely to remain a feature and therefore restrain the Bank of Canada from policy action as it admitted earlier in the week when it left the benchmark rate at 1%. Government bonds yield five basis points more today as bonds globally fall into a hole. The spread against treasuries continued to widen at a snail’s pace to sit at 15 basis points today.

British gilts – Selling pressures across the short sterling strip returned after the ECB press conference reigniting claims that the Bank of England would be forced to deal with rising inflation. The fact that the ECB now says it will do so was seen as a warning shot across the bows of the Bank of England. Short sterling implied reversed a positive tack set earlier in the day after a service sector report showed a weakening in the pace of activity. The strip had made gains of about four pips but the curve was trashed post-Trichet. The contract is currently lower by between six and 12 ticks along the curve. The yield on the March gilt future added eight basis points to 3.70%.

Japanese bonds – A downturn in the pace of activity across China’s service sector in February took some pressure off the need to tighten monetary policy and provided a better tone to risk appetite. Bond sellers showed up as equity prices gained with the Nikkei adding 1% for the day. The JGB future expiring in March fell by seven ticks to close at 139.63 as the yield on the cash bond fell by the most in two weeks lifting the 10-year yield to 1.28%.

Australian bills – Aussie 90-day bills seemed to respond more to a resumption of equity buying than the day’s data. Building approvals for January fell the most since 2002 with a slide of 15%. Meanwhile export volumes fell by 4%, yet implied cash yields bucked the data to rise by four basis points. Bond yields snapped a healthy gain on the week to rise by eight pips to 5.58%.

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.

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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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