Yield curves take back fear-driven gains

British gilts – Short sterling futures dipped by three basis points along the curve in a sign of how tired the market is following a strong advance for the most part of last week. Chancellor Osborne told politicians last week at an emergency sitting of parliament that “the recovery will take longer and be harder than had been hoped.” It seems that the austerity measures have taken a deeper hold on business and consumer sentiment than was hoped with growth forecasts for 2011 now lagging those of leading nations. House prices fell across the nation according to the latest reading from Rightmove Plc. The drop in asking prices of 3.4% across London homes was greater than in other cities and is a sign that recession is once again nipping at the heels of the economy. Gilt yields are unchanged at 2.53% having reached record lows last week.

Japanese bonds – All eyes remain on the value of the yen, especially those of Finance Minister Noda, who told a talk-show host over the weekend that he was prepared to make bold moves against the still-strong yen. Despite a sustained period of yen strength the Japanese economy shrank far less than economists had predicted in the three months ending June. GDP shrank 0.3% between quarters and by 1.3% on an annualized basis. Still, yields remained stuck at 1% to start the week with most economists forecasting an improvement in the current quarter, but insufficient to send yields climbing just yet.

Australian bills – Aussie government bonds fell sharply on Monday sending the yield on the benchmark 10-year yield nine basis points higher to 4.53%. The steadier start to Asian trading during the week helped confront arguments over an imminent rate reduction at the Reserve Bank. While many economists have recently jumped ship in the expectation that the central bank will act, not all are expecting lower interest rates. The soothing sight of rising equity prices helped weaken the argument for lower rates. So too did a July report showing an 8.6% improvement in new motor vehicle sales. For the year, sales improved by 0.9%. Aussie short-dated bill futures fell by 15 basis points tempering dealers’ expectations over the magnitude of any monetary easing.

Canadian bills – Bill prices fell by six pips on Monday while the yield on 10-year government bonds was unchanged at 2.46%. Money market prices in Canada shadowed the fortunes of those in the U.S. with shorter-dated yields backing up a little despite a poor showing from the New York Fed’s Empire State manufacturing report.

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.

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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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