A growing wariness has crept-up behind bond traders to cause rising yield curves to steepen along the way. The dollar has broken to its weakest since December 2009 broadening the appeal of inflation hedges found in commodities and elevating demand when supply is already short. Some central banks have already taken steps to prevent inflationary pressures from building by tightening the monetary belt. Dollar weakness is exacerbating the debate at the Federal Reserve over whether policy stimulus remains justified while bloating the prospects for inflation down the road. Investors are starting to sense this is not a good menu for fixed income.
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Eurodollar futures – The yield on benchmark government debt has risen by 45 basis points in less than a month. Admittedly rates have surged from panic-induced lows relating to Japanese events, but the last 15 basis points have come during April. This third weekly loss for treasury prices has sent the yield back to 3.59% and coincides with a break lower in the value of the dollar, which has been buffeted lately by eclectic views on the performance of the domestic economic recovery. Some members of the FOMC believe that the recovery has become strong enough to forego the remaining portion of a second wave of asset purchases, while the latest comments made yesterday by Sandra Pianalto clung to the life raft of “an extended period of time” for the current policy of low interest rates. At best, investors are focused on the turn of the year in terms of timing of the Fed’s exit from its current policy. However, at this point the debate is over whether policy will be adjusted this year or sometime next year.
European bond markets – That contrasts with the perennial hardline approach towards inflation taken by the ECB who closed the door on its emergency lending policy by raising interest rates for the first time this week in almost three years. Euribor futures suffered from delayed shock at the end of the week by sliding around seven basis points as bets built that the ECB would likely continue to tighten. The move extended through to the 10-year area of the curve where bund futures fell by 58 pips to 120.13 to yield 3.48%. German export data for February rose to the strongest pace in five months according to an earlier trade report and reviving hopes that the recovery continues to build a head of steam.
Japanese bonds – The maturing recovery process elsewhere in the world weighed on Japanese bonds this week culminating in a rise in the benchmark 10-year yield to 1.305%. Despite the fact that the Bank of Japan is likely to be the last central bank left in the building as others abandon varying shades of monetary easing, the Japanese yield curve is feeling the strain of rising curves around the world. Demand for the safety of government bonds is weakening in a risk-on environment. The Jun JGB contract eased 15 ticks to 138.57.
British gilts – British yields jumped by six basis points to 3.81% at the 10-year following a firm outcome for producer prices in March. The rising cost of goods leaving the factory gate registered a monthly increase of 0.9% leaving prices 5.4% higher on the year. Input costs jumped 14.6% on the year. The shorter end of the market was less pessimistic by the end of the session with 90-day futures paring losses of six basis points with nearby maturities ending with gains.
Canadian bills – The March employment report is difficult to interpret. The market was disappointed with a net loss of 1,500 positions for the month driven in part by the worst loss on file, since 1976 records began, for part-time positions. However, the number of full-time positions surged. The churn in the labor market means it’s hard to conclude that the economy cooled given the creation of many new positions across the food and accommodation industries as well as in the construction sector. Yields rose across the strip with short-dated 90-day bills of acceptance losing three basis points while the yield on the 10-year government bond added three basis points.
Australian bills –Demand for government paper fell by the wayside despite the success of an earlier-in-the-week auction. Yields rose in response to increasing demand for a stock alternative as Asian bourses closed the week on a high note. Short-end bill prices fell sending implied yields higher by five basis points forcing the gradient of the curve higher as the steepening process grinds forward.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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