Bond prices continue to swing and are buffeted by the competing views of U.S. policymakers. The diverse set of opinions from an array of speakers during the past week clearly illustrates that the members of the Fed’s policy-making committee have plenty to discuss when they next meet. And although no change in interest rates is likely to result it would benefit the central bank to put the recovery of the labor market in to context so that a far-faster decline in the headline rate of unemployment regains once again holds water for market participants.
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Eurodollar futures – Traders are far more accustomed to driving fixed income prices in response to critical data points than they are based upon individual views. But these days, economists are having a hard time peeling the label off the recovery. Without a doubt the recovery is in place according to practically each economic report. But the Fed tacitly claims that it’s behind the process and without its little understood policy there would be no improvement. Others dispute this claim sensing that the economy has traction of its own these days. At least some of the Fed’s more influential policy-makers including Bernanke and Dudley argue that the improvement in the labor market has some way to go before it should close the door on ultra-loose monetary policy. Others including Bullard and Lockhart seem happier to take improving data at face value and feel the FOMC should address the need to see out the remainder of its bond purchase plan. On Monday bond prices advanced as investors feel the doves will win the day. Yields fell across the Eurodollar strip by six basis points while the June 10-year note advanced towards last week’s highs sending yields down to 3.42%.
European bond markets – The European bond market got off to a poor start faced by the headwinds of acceleration in producer prices during February. While the monthly pace of increase dipped between readings the annual pace of gain marched up to 6.6% and drove the 10-year benchmark German yield close to a 15-month high. The recent eight-days of losses for bund prices is the worst string since June 2006, although some of the blame has to come from relief from Japan that radiation leaks resulting from the meltdown at a nuclear-power plant wasn’t worse. The ECB is widely expected to signal higher interest rates at Thursday’s meeting and investors are increasingly concerned that tighter monetary policy will exacerbate the slower pace of recovery in peripheral nations. While German yields followed the mid-morning lead from the U.S. benchmark on Monday, those on Portuguese government debt rose sharply for fears of a rising debt burden.
Japanese bonds – Ahead of the first auction of the new fiscal year on Tuesday, bond sellers forced yields higher over fears that the rising debt burden resulting from earthquake damage might drag yields higher. Stocks continued to recover and former currency minister Sakakibara offered solace for exporters by predicting a depreciation of the yen, although this might come at the cost of overseas investors bringing money home from Japan. Either way, higher yields maybe a natural outcome. The 10-year yield started the week badly and rose to its highest in three weeks at 1.285%. The June JGB futures contract eased by four basis points to 139.15.
British gilts – Implied short-end yields stepped higher on Monday leaving a hairline gap between last week’s closing prices for short sterling futures, which rose by three basis points. A PMI construction index remained in positive territory for the third month but failed to sour the positive overtone for monetary policy. June gilt futures are in the middle of a 43 tick session range and last traded three ticks higher at 116.87 leaving the yield unchanged at 3.73%.
Canadian bills –Canadian bill prices failed to match gains for U.S. Eurodollar futures but managed to gain by about half. The strip rose by four basis points while government bond yields eased by a pip to 3.35%. The gap between the North American pair has narrowed remarkably during the past week as some Fed officials dull the need to adjust its stance against an improving economy. At the same time Canada faces an election in a month’s time.
Australian bills –Australian government yields spent the session going nowhere ahead of this week’s Reserve Board meeting at which market observers expect no change from the central bank. An ANZ report showed employers continued to place more online and newspaper ads for workers with the index increasing 1.3%. A TD Securities reading of prices faced by consumers accelerated to a 3.8% pace and well above the 2-3% official range acceptable to the central bank. Regardless of that reading, which contains the aftermath of a whiplash for commodity prices but doesn’t fully reflect the RBA’s policy tightening, bill prices made gains of two basis points to start the week.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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