IB Interest Rate Brief: Discount rate discussions keeping floor under bonds
Once again bond markets are having a hard time maintaining a rally after the Fed’s earlier stand on its policy of maintaining low interest rates. Dealers continue to mull the potential for a second nudge higher in the Fed’s discount rate, which is overhanging market sentiment. As much as investors want to see a continuation of near-zero interest rates the threat of increases at the Fed’s symbolic rate serves to remind fixed income investors that benchmark interest rates may not be going up today, but that’s the general direction at some unspecified point. The relief rally in the Eurozone that’s helped push yields towards record lows also appears to be running tired of the story that Greek woes will splinter the Eurozone.
Eurodollar futures – There is nothing on the U.S. data calendar today and the dominant theme seems to be coming from north of the border where Canadian inflation data threw down the gauntlet to the Bank of Canada. Although U.S. prices remain contained, rising Canadian price pressures serve to remind fixed income investors of exactly what happens when growth resumes and resource slack is gradually taken back. Bond futures fell following the report with the June contract sliding to an intraday low of 116-245 before rallying to 116-30. The 10-year yield stands at 3.69%.
European short futures – Euribor futures are unchanged once again and remain unfazed by the growing schism in the Eurozone over whether or not the member states should finance Greek problems or whether they should simply refer the government of Greece to work out a package with the IMF. June German bunds are marginally lower on the day at 123.08, where the yield reads 3.12%.
Australian rate futures – Aussie bills prices shed six basis points overnight possibly in response to the firmer tone to regional stock markets. While economies are buzzing in the region and confidence has resumed, investors remain conscious at least of what the Chinese central bank and government might yet do to stem growth. The yield at the 10-year Aussie government bond added two basis points to stand at 5.66%.
Canada’s 90-day BA’s – The Canadian yield curve took an earlier pounding after the release of February data for consumer prices, which showed an unexpected 2.1% year-over-year reading in the core rate inflation. Investors’ nerves were frayed and bets were stepped up that the Bank of Canada might need to abandon a frozen policy promised through mid-year. The February reading was supposed to decline from 2% to 1.7% yet now stands above the central bank’s target level. The sensitive two-year bond yield surged eight basis points to 1.63% and the five year yield jumped by five basis points to 2.85%. The June 10-year bond future slumped 18 ticks to 118.33 sending the yield one basis point higher to 3.47%. Bond prices are rebounding somewhat as analysts ponder whether the recent Olympic games may have temporarily boosted certain seasonal prices.
A surging Canadian dollar now looks set to test parity ahead of the next policy-setting meeting, while three-month bill prices slid following today’s report. And while the bond curve may have flattened, calendar spreads widened out watching bill prices as futures contracts lost more ground at later expirations. The December bill contract sliced through support at 98.47 and put in a low at 98.37, while the June 2011 contract shed 10 basis points to imply a yield of 2.36%. Current short term rates in Canada stand at 0.25%. The calendar spread spanning the year starting in June widened by five basis points to 170 basis points.
British interest rate futures – Short sterling futures are lower and running contrary to the action in the pound today, which fell after comments from Bank of England policymaker Andrew Sentance, who discussed the prospects for a double-dip recession. Gilt prices are higher with the yield dropping just one basis point to 3.96%. June gilts are up by five ticks on the day at 115.01 but are currently the only major rising bond market at this hour.
Japan – Bond yields at the 10-year area of the curve pared earlier in the week losses to close at a yield of 1.35%.
Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com
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