Bonds limp into weekend

IB Interest Rate Brief: Bonds limp into the weekend

Yields have surged since the panic peaked following the earthquake and its aftermath wreaked havoc in Japan. Bond yields touched their lows nine days ago in light of a strengthening yen, which merely exacerbated financial dysfunction. The slow grind south for bond prices has driven U.S. benchmarks yields higher by one quarter of one percent showing the flipside to a recovery in risk appetite. At the end of a long week the only thing driving a recovery towards lower yields is a fading rally for equity prices.

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European bond markets – European bonds don’t feel too responsive to any efforts to revive them this morning. German IFO business expectations declined perhaps reasonably so following the Japanese events and a string of positive leaps for the business climate index. Overnight German Chancellor won her argument to reduce the amount of paid-in capital to the bailout process, which caused some weakening of the euro currency earlier. June bunds have powered off a 121.90 base to trade at 122.11 to yield 3.26%. Short-dated euribor contracts fell by a couple of ticks.

Japanese bonds – Bad news is wearing thin from Tokyo and international investors are responding with more purchases of stocks and bonds in Japan following the incident two weeks ago. Tokyo stock exchange data showed a surge in equity purchases to a seven-year high by overseas investors, while bond flows were also boosted. The benchmark 10-year yield rose to 1.21%.

Eurodollar futures – Notes rose in price even after an upward revision to annualized fourth quarter growth from 2.8% to 3.1%. Meanwhile consumer-confidence backed off its recent heights according to a University of Michigan report for March. June notes rebounded from a low at 119-12 to reach 119-21 as the morning progressed. Equity prices are closer to unchanged despite a strong pre-market performance, which is adding to demand for fixed income following a rise to 3.40% at the benchmark 10-year yield on Friday.

British gilts – Gilt prices are steady but remain a little lower in a broadly rising environment for yields. Short sterling futures are off session lows with the strip lower by a single pip towards the close. There is no fresh economic data to report at the end of a week in which expectations for higher interest rates fell in response to gloomy predictions for growth and weakness in retail sales.

Canadian bills – Yields are unchanged at the end of the week with the June future six pips lower at 121.21 to yield 3.20%. Notably the 10-year U.S./Canada note spread has widened out to 120 basis points this week as yields pared gains. Canada retains its so-called “fiscal halo” due to its likely reemergence from budget deficit faster than in any other westernized nation. Bill prices gained by a pip.

Australian bills – Aussie government bond yields had fresh little news to trade off. Regional stocks were positive but while risk appetite faced an upswing it failed to knock the appeal of government paper yielding 5.41%. Short-dated bill prices did dip by about three basis points.

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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