Yields ease as Fed rethinks post QE2 actions

Global bond yields are standing easy ahead of the April FOMC meeting, which concludes its two-day meeting Wednesday with the first-ever press conference to be conducted by Ben Bernanke. And while U.S. bonds are leading major government yields lower, peripheral bond prices in Europe are once again in free-fall as investors grow increasingly concerned that debt restructuring is a near-certainty.

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Eurodollar futures – Dealers predict that the Fed will discuss ways to prevent yields from rising in advance of the completion of its $600 billion bond purchase program at its two-day policy fest starting today. Yields fell to a one-month low as investors grow a little more concerned that the economic recovery is likely to lose momentum after completion of the second round of quantitative easing. Deferred Eurodollar futures contracts made gains of almost six basis points as the yield curve continued to flatten. The June Treasury note future added four ticks to 120-15 sending the benchmark 10-year yield down to 3.34%.

European bond markets – Despite talk of ongoing monetary policy correction this year, German yields continue to stall. An interview with ECB’s Trichet appearing in a Finnish newspaper today suggests second-round inflationary pressures are showing up in dribs and drabs. That means that the central bankers will continue to reduce monetary stimulus despite the Bank’s policy of conducting targeted government bond purchases. Austrian banker Ewald Nowotny already sanctioned the next two quarter point increases priced in by the market when he called them “appropriate” last week. Euribor futures nevertheless made gains of as much as three basis points on Tuesday with the December 2011 expiration pricing in a three-month Libor of 2% compared to the ECB’s 1.25% current benchmark.

Canadian bills – There’s not a lot to talk about in terms of market action in Canadian credit markets, with bill prices making mercurial gains at deferred maturities. The one basis point dip in the benchmark government bond yield to 3.22% is half of the gain seen in U.S. Treasuries on Tuesday and forces the gap between the two to narrow to 12 basis points today. June bond futures are relatively unchanged at 121.30.

Japanese bonds – A two-year auction of government paper met with hefty demand, five-times the amount on offer, helping to keep yields low across the curve. The June JGB futures contract added 22 ticks to 139.85 sending the 10-year yield lower by two pips to 1.205% as the Nikkei 225 index shed 1.2% overnight. Department store sales in Tokyo and around the nation unsurprisingly slumped during March following the earthquake according to a government report released Tuesday.

British gilts – Short sterling prices rose sharply again following a drop in total orders in the most recent CBI Trends survey adding weight to the argument of the dovish majority within the MPC. Policy-hawk Andrew Sentance used an address to his audience in Manchester to warn that inflation might remain above the central bank’s 2% target “for some time” to come in light of strong global growth, weakness in the value of the British pound and strength in global oil prices. Implied short-end yields tumbled by seven basis points while the 10-year yield fell to 3.50% as the June gilt futures contract added 44 ticks and surpassing the March 15 low for yields.

Australian bills – Again there was little by way of influence for 90-day bill prices with implied yields sticking close to 5% through year-end. The Reserve Bank has indicated that it’s happy with its short-rate stance at 4.25% for the time being while money dealers continue to price in further monetary tightening over the course of the remainder of the year. The benchmark government bond yield eased by one pip to 5.45%.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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