Most of the effect of St. Louis Fed Chief Bullard’s comments is showing up in demand for the dollar rather than across the yield curve. Many dollar bears are being shaken while the response in the credit markets appears a little more sanguine even as Mr. Bullard attempts to accelerate the debate on an earlier end to the Fed’s buying of bonds. Yields are little changed across the map as investors weigh up the warmer degree of risk demand and consider the side effects of rising prices.
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Eurodollar futures – Of most concern to St. Louis Fed Chief James Bullard appears to be the length of time it may take to travel from super-easy back to normal given the Fed’s generous stance. “If the economy is as strong as I think and hope it will be in 2011, I think it will be time for us to start to reverse our ultra-aggressive and ultra-easy monetary policy,” said Mr. Bullard. He also said that perhaps the Fed could forego purchasing $100 billion of bonds out of whatever amount is currently left to buy ahead of the June timeline. Mr. Bullard’s vision is akin to turning the proverbial tanker, which unlike a speedboat takes time to maneuver into place. As a result there is little impact at the front of the Eurodollar curve while deferred maturities slipped by a couple of pips. The June Treasury note future is unchanged to softer to yield 3.43%.
European bond markets – June bunds are slightly lower after ECB Chief Trichet warned he wouldn’t be happy if consumer prices remained above the central bank’s 2% ceiling. The contract remained defensive following the compilation of German state data even though the annual 2.1% pace of increase fell short of analysts’ expectations. Euribor contracts maintained a negative bias falling by three basis points as investors prepare for an April 7 governing council meeting at which a 25 basis point increase in short-term rates is assured. June bunds are lower by 12 ticks to 121.57 and close to the session low. An earlier report on the health of consumer confidence in Germany suffered a setback thanks to rising energy prices. The April GfK survey slipped from 6.0 to 5.9 for its first decline in 10-months.
Japanese bonds – Yields remained unchanged at 1.225% overnight in Tokyo as legislators attempt to formulate steps to deal with launching sizeable bond tranches to fund reconstruction after the earthquake. While it’s likely that Japan will be able to raise all of the estimated $308 billion its government estimates the damage to be, the trick will be to do so without crippling its fiscal health. Already the nation has outstanding debt of twice its GDP. Lawmakers are mulling plans to postpone a reduction in the rate of corporate tax while some note that if made permanent the measure might accelerate relocation of Japanese manufacturing abroad. Politicians are also floating the idea of a rise in personal taxes to soften the damage to Japan’s fiscal health. JGB futures added nine pips to 139.73.
British gilts – Implied yields inched lower but only by one pip in London as investors continue to see a lower likelihood of an imminent interest rate increase at the Bank’s meeting in nine days time. June gilt futures behaved in line with other international long-ends and slipped by 17 ticks to 117.64 where the yield rose to 3.61%.
Canadian bills – Expectations for tighter monetary policy continue to be dampened in Canada. Ahead of the weekend the government collapsed and that means a national election. Such events typically sideline the central bank, which wants to refrain from finding itself in the middle of a political spat. Election aside, there remain few reasons to adjust policy despite the warmer international environment given the upwards adjustment to the domestic dollar, which is crimping both inflation and external demand. Deputy Governor Jean Boivin noted that Canadian productivity had some way to go in the face of a rising exchange rate when he noted that Canadian manufacturing output was being displaced by cheaper alternatives from Mexico and China. Bill futures are lower today but less than Eurodollar futures, while the June government bond was a mild six ticks lower at 120.55 yielding 3.26%.
Australian bills – Bill prices continued to trade in the opposite direction to a recovery in risk appetite as Asian stock benchmarks traded higher. Credit market dealers are still backing away from the recent push towards an immediate cut in monetary policy that emerged after the dramatic events unfolded in Japan. Bill futures fell sending implied yields four basis points higher overnight while the yield on government debt slipped by one basis point as dealers conclude that policy is likely to remain on hold until further evidence in either direction emerges for the need to sit on the fence. Later this week a retail sales report is widely expected to receive a boost from insurance spending related to the Queensland flooding.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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