Bonds pare huge gains as equities recover

British gilts – A Bank of England quarterly survey of consumer price expectations revealed a nudge higher in inflation expectations one year ahead. The index showed a rise to 4% in response to the survey question of “where do you expect inflation to be a year from now?” At the time of the previous survey taken in November, respondents collectively predicted 3.9%. The survey also showed that 65% of those asked said they would seek out cheaper groceries in response to the level of inflation while only 9% said they demand higher wages. Yesterday the government reported wage growth in the three months ending January of 2.2%, which is tame compared to the current 4% pace of price increases. Such insight into the consumers’ thought and response process is likely to be a positive factor at the MPC who will be pleased to see that inflation is far from becoming entrenched in the wage-setting process. Gilt futures fell sharply in line with other long ends sending the benchmark yield six basis points higher to 3.54%.

Canadian bills – Canadian bill prices matched declines in eurodollar prices while its government bond prices fell far less than treasuries did. While the U.S. benchmark yield added eight basis points to 3.25% today, the Canadian yield added just three pips to 3.15%. Next week Finance Minister Flaherty should deliver good news on next year’s fiscal budget as the government continues to aim to become the first G7 nation to balance its books following the financial collapse.

Australian bills – Australia’s economic exposure to Japan has helped shift forward yield expectations. The world’s third-largest economy accounts for about one-in-five dollars in GDP and the temporary disappearance from a normal trading relationship will weigh on the Australian economy. Bill prices were marginally lower overnight after a giant flattening of the curve and after the Japanese tragedy, dealers are now positioning for an interest rate cut as soon as the April meeting at the RBA according to swaps markets.

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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