Minutes from the March FOMC meeting scheduled for release later on Tuesday might shed further light on the thought process in place at the Fed. Lately some members have spoken out and raised question marks over the benefit of completing its bond purchase program in the face of what appears to be a healthy recovery. That recovery has also delivered a sting in the shape of a rally for commodity prices that has raised the credibility stakes between central bankers. The ECB has promised to stop the rot with a rate increase this week while Chairman Bernanke said that he would change his stance on monetary policy if his instincts were wrong and that inflation spilled over into consumers’ expectations.
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Eurodollar futures – Bond prices have reversed earlier gains encouraged by rising fears for the health of the Eurozone in light of another downgrade or Portugal. The June Treasury note future earlier reached 119-13, enough to send its yield to the lowest in a week. But ahead of today’s non-manufacturing ISM reading which disappointed hope that it would remain near a six-year high, yields have risen to 3.43%. In a speech on Monday Fed Chairman Bernanke said the central bank might need to respond to rising inflationary pressures if his instinct failed him and rising commodity prices threatened to entrench with consumers’ expectations. For now, he says this isn’t happening and he cast doubt on the recovery, which he said was “not as strong as we’d like it to be.” Ahead of minutes from the March FOMC meeting Eurodollar futures have taken back around three basis points of Monday’s opening rally.
European bond markets – Yields were capped at the European open by a further Moody’s downgrade of Portugal’s long-term credit rating as the agency said it doubted the nation could avoid a financial bailout. The 10-year spreads between Germany and Portugal widened by a further 15 basis points. German bunds also found support following a retail sales report showed consumers didn’t spend as much as analysts had initially forecast during February. Sales fell at retailers by 0.1% rather than growing by 0.5% to leave the year-over-year pace of growth down to just 0.1% from 0.7% in January. However, the credit market is still braced for higher rates in two days time and the investors prefer locking into the rising yield curve at this point. The June bund last traded at 121.01.
Japanese bonds – The first bond auction of the new fiscal year attracted almost four buyers for each bond up for grabs on Tuesday snapping four days of sliding bond prices. The 10-year yield edged lower to 1.265% amid rumors that the Bank of Japan would use the April meeting to ease monetary policy further by ensuring liquidity flows down through the banking system to companies in urgent need of cash flow. June JGB futures added 13 ticks to close at 139.36. Economists have revised growth lower for 2011 in light of the disaster striking the nation with complications added by nature, which may delay the reconstruction effort.
British gilts – Interest rate expectations picked up some steam Tuesday after a PMI services report for March jumped to an 11-month high. The Markit Economics services index accelerated to a far-stronger 57.1 after 52.6 in February. The company expects that in conjunction with the strength displayed by its construction activity index, the economy will rebound by 0.8% in the first quarter after an unexpected 0.5% contraction at the end of 2010. Implied short-end yields rose for a second day as short sterling futures fell by as much as nine ticks at deferred maturities. The June gilt future fared poorly on expectations that the report might yet instill an interest rate increase from the Bank of England. June futures slid to 116.62 at the day’s low to yield 3.75%. However, a British Chambers of Commerce report revealed a lackluster response in its survey today showing “disappointing” results across manufacturing and only “slight improvement” in the health of service-industries. Currently credit markets are looking through the report.
Canadian bills – Canadian bill prices are just one basis point lower and so less than losses for U.S. Eurodollar futures. In an earlier report this week the Bank of Canada showed that business executives were struggling in the face of the burden of a rising currency, which also restrains inflation. Government bond futures for delivery in June slipped by 11 ticks to 119.71 yielding 3.34%.
Australian bills –Australia’s central bank noted that the pace of price increases was being nicely tamed by the strengthening Aussie dollar and had played a role in preventing the central bank from further adjusting interest rates. Interest rate markets responded by pricing out further moves leaving forward 12-month expectations of just 16 basis points of further tightening and not even the Bank’s minimum quarter point increment. The nation returned its first trade deficit since March 2010 according to the February trade balance reported today. The Bank had noted the drop in output at mines flooded during the summer hurricane. Bill prices added just a couple of basis points with the flatter curve evident in the Sept. 11/March 12 calendar spread at just 21 basis points.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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