Bernanke bulls caught napping as yields rebound

Two pieces of economic data questioning the conviction of bearish expectations ahead for the economy provoked sales of U.S. bonds midweek. Elsewhere bond yields rose even though some measures of sentiment continued to fall. It would seem that the market is fully prepped for Fed Chairman Bernanke’s Friday delivery in Wyoming even though they know not what to expect.

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Eurodollar futures – September Treasury note futures slid by a half-point to a session low after a national housing report indicated a 0.9% rebound for home prices. The report is at odds with other evidence of sliding sales of both new and previously owned homes, while refinancing predominates mortgage deals. The September future traded down to 129-25 boosting the benchmark yield by five basis points on the day to 2.21%. The 4% increase in durable goods orders for July was the strongest showing in four months and helped reverse earlier negative sentiment for stocks. Eurodollar futures were unusually resilient despite the jump in risk appetite with nearby futures adding four-to-six basis points. Deferred maturities eased reflecting the rise in bond yields.

European bond markets – German bund prices also fell while selling picked up in direct response to a recovery in investor sentiment in the United States. The midweek jump of seven basis points in the bund yield to 2.19% is at odds with data released in Germany earlier showing a slide in optimism displayed by German executives. Ailing global demand and spending cuts by Eurozone governments had inspired a slide in yields alongside a bearish domestic stock market. The ECB was again prompted to purchase Spanish and Italian bonds after yields on Greek shorter-dated debt surged. Fears amongst investors grew that a second bailout package for the nation would be delayed. Conflict has recently emerged between the 17-nations over collateral demands have been touted in order to convince some governments to assist Greece.

British gilts – September gilt futures lost 77 pips to 128.68 as investors lost sight of hopes for a resumption of asset purchases from the Bank of England and in the face of a general slide in global bonds. Some of the fear premium is generally coming out of bonds worldwide as investors see that not all data indicates a worsening of the global economy. Bond bulls were unsettled by earlier readings of rising mortgage approvals in the U.K. and evidence of an improved outlook from factory owners. Short sterling futures mimicked the activity across the Eurodollar strip where nearby maturities made headway while deferred contracts dropped. The decline for the 10-year gilt sent the yield up by 10 basis points to its highest in a week at 2.49%.

Japanese bonds – Japanese yields failed to respond much at all after the Finance Ministry announced measures to cope with a strengthening yen. The yield remained unchanged on the day at 1.00% after Mr. Noda diverted funds from the nation’s currency reserves to a $100 billion pool set up to enable manufacturers to borrow in order to relocate offshore or secure energy sources according to the minister. The Japanese bank for International Cooperation would sell yen for corporations wanting to secure operations abroad, circumventing a restrictive appreciation of the yen.

Australian bills – The rebound in risk appetite earlier in the week set a negative tone for implied yields through the bill futures market. Bill prices eased by up to five basis points as equity markets staged a rebound across the region. Nevertheless, domestic data was downbeat with a leading index compiled by the New York Conference Board employing June data souring to the tune of 0.8% and that following a negative revision to the May series. Demand for government bonds increased tipping the 10-year yield lower by three basis points to 4.34%.

Canadian bills – Implied cash yields rose by five basis points after fixed income players digested the key U.S. durable goods report. Bill futures declined across the strip while the government bond futures contract expiring in September shed 46 pips to 131.61 lifting the yield by one basis point to 2.39%.

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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