Bonds continue to soar

IB Interest Rate Brief: Cramer where are you now? The bears are calling!

The U.S. benchmark yield sliced through its record low Thursday like a hot knife through butter after forecasters reined in global growth hopes over failure of European authorities to deal with worsening sovereign debt issues. Comments from Fed speakers rattled equity investors by explicitly stating that its policy of ultra-low interest rates for the next two years was not intended to be a kid glove for the equity markets. Just about every economic indicator under the sun has recently wilted and with bears hell bent on challenging last week’s index lows, all we’re missing is a Jim Cramer meltdown on financial talk-shows just to let us know just how bad it really is.

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Eurodollar futures – Cramer’s famous CNBC rant a couple of years ago was inspired by angst that the Fed and Treasury were out of touch with the pain his hedge fund friends were living through. “They have no idea…” screamed Jim, repeatedly as anchor Erin Burnette stood by wondering what she could do to calm him. Thursday’s market decline is reminiscent of the bear market woes at the peak of the financial crisis when investors were looking for the Fed and Treasury task force to stop the bleeding. Only this time the growing laundry-list of economic woes seems to be getting longer with fewer events to check off. Only this time round the Fed has little armor left and fiscal policy is held hostage to a bigger deficit than when the original recession took hold three years ago. With fewer places left to turn to for help and with the Fed’s dissenting duo of Fisher and Plosser telling investors that the central bank has no mandate to save their speculative hides, the bearish mood returned. Pushing the yield market off a cliff Thursday was the Philly Fed index, which simply cratered towards recessionary territory. Most unnerving was a slump in the gauge of new orders within the report, indicative of further slowdown ahead. The 10-year yield reached 1.97% at the day’s low but stability had resumed ahead of lunchtime with the yield backing-up to 2.06%, but that still means an 11 basis point slide on the day.

European bond markets – Two-year German yields fell to the lowest point in 13-months while 10-year bund yields fell to another record low over global growth downgrades predicated on funky European policies. The 10-year yield in Germany currently stands at 2.08% and matches the size of yield decline witnessed in U.S. markets as the prediction of weaker growth is paced by a growing chorus of evidence to that effect. Hopes had been running high that French and German political powers might reverse an earlier decision not to create a central agency that would issue and support euro bonds on behalf of participating governments. The circuitous arguments back and forth between member nations is causing not only fatigue amongst those trying to assess the latest announcement of nothing, but is also showing up in economic numbers where clear evidence of a slowdown is evident. The suggestion in today’s WSJ that the Fed is sizing up access to liquidity at European lenders with a Wall Street presence helped spur a rally in euribor contracts Thursday with expirations after March 2012 making a 17 basis point advance.

British gilts – Yields rang another record lows at the 10-year horizon in Thursday’s turmoil and after a government report showed retail sales missed forecast in July. Consumers remain constrained by stagnant wage growth at a time when buoyant utility prices continue to erode incomes leaving the Bank of England embarrassed to tighten monetary policy. In minutes of the August meeting released yesterday the two dissenting voices finally choked on their words and stopped voting for a rise in interest rates. And with inflation continuing its ascent and with the price outlook worse than when Chief Economist Spencer Dale started arguing for tighter policy, one wonder what it was that brought him to his senses. Oh – must be the economy – how stupid of me!

Japanese bonds – Japanese yields shed three basis points overnight to close at 0.987% after a government report showed falling exports and rising imports offered evidence that the rising yen is straining the environment for manufacturers. The yen remained in a tight range versus the dollar and the market appears to be preparing for an imminent showdown with the Bank of Japan in a battle over its value. All it will take now is for a further selling spree across equities to unravel for the authorities to intervene.

Australian bills – With risk fast-becoming a dirty word among investors around the world, Australian credit markets fast-responded to the latest puke for regional equity indices. The market didn’t need any domestic data to mull over or digest given the ugly picture that equity prices are painting. Bill prices jumped by 18 pips sending the implied yield on the June 2012 maturity down to 3.64% and reflecting more than a full 1% off the Reserve Bank’s short-term 4.75% rate.

Canadian bills – Bills of acceptance surged again making a play for the low tide left behind when equity prices plunged last week. Implied yields fell by 10 basis points as stocks wilted and commodity markets plunged as growing recession evidence washed up on all shores. Government bond prices also advanced sending the yield on the benchmark 10-year down by 10 pips to 2.28%.

Andrew Wilkinson

Senior Market Analyst

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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