Credit markets glanced across the street at still-boiling equity markets and figured that vigorous recovery might not bode well for monetary policy around the world. Tensions rose within the Eurozone with a surge in peripheral government bond yields strong enough to suggest that governments will need to sit down with lenders and figure out a restructuring deal before the next batch of funding has to be done. Elsewhere firm economic data drove key bond yields higher in front of the first installment of Bernanke TV.
Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis.
Eurodollar futures – Instead of the usual drill of deciphering the FOMC’s policy statement in search of additions and omissions at 2:15 ET this afternoon, Chairman Bernanke will meet the press and figure out how much detail he wants the media to know about the future. The policy statement will be released almost two hours ahead giving journalists time enough to find an inoffensive way of asking ‘how long is an extended period?’ The Chairman is not expected to say much simply because that’s the way of any central banker’s world, but he’d be wise to use the opportunity to float ideas offered by both hawks and doves surrounding him in order for the market to digest good ideas and bad. After all, the whole idea of devising post-meeting press conferences is to peel another layer off the onion in terms of providing more transparency in to the Fed. Eurodollar futures shed five pips while 10-year notes fell adding four basis points following a stronger-than-forecast rise in March durable goods orders. At the same time the previous month’s data was revised to a gain from an earlier recorded loss further dampening enthusiasm for bonds.
European bond markets – German inflation data for April revealed that energy prices caused a firming of the annual pace of increase to 2.4% and further away from the ECB’s 2% ceiling for the Eurozone as a whole. Comments from governing members recently have warned that the central bank will continue to restrict monetary policy in order to keep price increases from becoming entrenched within the economy. German bund futures expiring in June lost about half of one full point to trade at 122.03 sending the yield higher by two basis points to 3.27%. Euribor futures sagged sending implied yields six basis points higher having earlier dipped to the lowest in four weeks. Greek, Irish and Portugal bond prices flopped again as the drama over a possible restructure weighs. Equity traders meanwhile looked the other way.
British gilts – A rebound in the health of the British economy and a less comfortable backdrop for interest rate markets saw implied yields on short sterling futures reverse recent gains. As predicted the economy completely offset a 0.5% fourth-quarter loss by growing as much in the first-quarter of this year. December futures shed seven basis points while the implied yield on the December 2012 futures contract added 10 basis points as the yield curve steepened. June gilt futures fell by 61 ticks to stand at 118.46 as London headed into the close pulling the yield at the benchmark 10-year higher to 3.53%.
Canadian bills – Canadian credit markets soured in sympathy with U.S. markets and saw exacerbated losses across the yield curve. Implied short-end yields rose by five basis points while the June government bond future recently reached the day’s low at 121.16 to yield 3.22% and three basis points more than at Tuesday’s close. Government spreads remain relatively tight at 12 basis points between North and South of the border.
Japanese bonds – Bond futures expiring in June rose to a six-week high pushing yields down to 1.20% after March retail sales collapsed in light of the earthquake and its aftermath. Sales at retailers slid 7.8% between months while confidence among small business owners fell from 49.5 to 36.1. Enthusiasm among bond buyers was, however, tempered by a downgrade from S&P for the outlook for Japanese sovereign debt. The agency cut the outlook from ‘stable’ to ‘negative’ on account of the soaring recovery cost to recent disasters affecting the nation.
Australian bills – First quarter inflation data came in above expectations as well as above the RBA’s 2-3% target band for prices. A 1.6% change between quarters left the annual pace of inflation at 3.3% after a fourth quarter 2.7% increase. The money market stepped up its expectations for tighter monetary policy with 90-day bill prices slipping by 10 basis points sending implied yields jumping. Bond yields gained four basis points to close at 5.48% as traders priced in a 62% chance of a rate rise by year end. Current short rates stand at 4.75%.
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.