Bonds ignite after mid-session confidence crisis

Treasuries staged a rebound after three daily losses and despite a positive impact on sentiment at least in the equity market after Bank of America welcomed Warren Buffett on board as a preferred shareholder. Dealers had been marking bonds lower ahead of the Jackson Hole speech from Bernanke on Friday as consensus views conclude that there will be no additional stimulus from the Fed at this meeting. On reflection, yields are lower than one year ago at the time of the last symposium, while inflation heated up as a result of the policy response creating some friction amongst FOMC members.

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Eurodollar futures – Pennsylvania’s state capital Harrisburg warned that it might miss a September interest payment. Treasury note futures accelerated after this seemingly anemic announcement with the contract jumping by about half a point lowering the yield by eight basis points at 2.22%. Auctions of fresh government debt at record low yields didn’t fare too well earlier in the week putting upside pressure on yields just as dealers were also dumbing down stimulus hopes from Jackson Hole. The recent durable goods report drew a line under more bearish data and helped play down the argument for fresh measures from the Fed. Already three FOMC members have taken issue even with the rewording of the latest policy statement, which moved from “an extended period” to “at least through March 2013.” The health of the economy was once again under scrutiny in the form of weekly initial claims data, which came out worse than expected at 417,000. Last week’s number was also revised higher and even after adjusting for temporary signings accounted for by Verizon employees on account of a labor dispute, the reading remains frustratingly above the 400,000 mark.

European bond markets – German bunds have staged a major turnaround after yields rose during the past several sessions. A preliminary reading from GfK for its consumer confidence indicator continued to dip having fallen steadily from a reading of 6.0 during March. The index today fell to 5.2 and was accompanied by a warning from GfK that it would likely wilt further. Benchmark yields fell as the crisis in Greece escalated. For several days observers have pointed to sky-high bond yields caused by a growing division over collateral demands initiated by the Finnish government. It signed an agreement with Greece, which would require ratification by 15 other member nations before Athens could receive its second round of bailout assistance. Onlookers correctly point to an increased risk of Greek default, while the ECB now simply has to look the other way and continues to buy only Italian and Spanish bonds on the open market. German 10-year yields edged lower to 2.18% after reversing losses with the September futures contract trading higher to 134.98 at the session’s best level.

British gilts –Gilt futures rebounded by more than a full point from a session low at 127.94 after two bearish economic reports. As the U.S. session wore on with equity indices reversing a bullish response to the Bank of America news, gains for gilts accelerated. The contract reached a peak at 129.05 driving the yield down to 2.47%. A CBI report showed the stressed consumer bought less clothes and household items during the month with a net -14 reading as volumes fell among retailers following a July reading of -5. Consumer confidence is also weakening according to a Nationwide survey where respondents were less prone to make a major financial purchase and predicted weaker home values during the next six months. Short sterling futures remain higher on the session after an earlier jolt lower before the reports.

Japanese bonds – The falling yen combined with a better environment for stocks forced some bond liquidation on Thursday and as investors felt a slightly lesser need to hold government paper. September JGB futures fell by 32 ticks to 142.33 for the heaviest decline in two weeks adding three basis points to the benchmark 10-year yield.

Australian bills – Rising risk appetite and cooler hopes over what Bernanke might deliver Friday conspired to depress bill prices in Sydney. The contracts fell by 14 basis points across the strip although the cash market still implies a significant monetary loosening at the Reserve Bank this year. Government bond yields rose by three basis points to 4.42%.

Canadian bills – Government bond futures shrugged off an earlier decline towards the lowest point in almost two weeks to trade higher on the session joining the swing lower for yields across other global bonds. The September futures contract rose to 131.40 where the cash yield on the 10-year eased to 2.41%.

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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