Andrew Wilkinson @ 11:24 AM, Thursday January 07 2010
Eurodollar futures – Bond price have remained under pressure Thursday although benchmark U.S. treasury note futures have reversed sharply off intraday lows at 115-18 and are trading at 115-29 with a yield of 3.84% and two ticks higher on the session. The shorter end of the curve is facing deeper losses following the release of weekly initial jobless claims, which came in at 434,000. The data may have raised the appeal of longer dated bonds on the view that although the economy is improving, it’s not likely to spur a massive recovery in the labor market just yet. There is a mixture of bargain hunting and short-covering that’s preventing bonds from deeper losses ahead of Friday’s key employment report.
The fixed income market continues to digest the minutes from the December meeting at the Federal Reserve in which members debated the potential need to add further stimulus when the existing measures ran their course in the first quarter. The FOMC clearly attaches enormous weight to the housing market, where it is close to finalizing the purchase of $1.4 trillion in mortgage securities. Having achieved stability in declining real estate values the Fed has scored a major victory albeit at a great cost to the tax payer. But one gets a sense from yesterday’s minutes that such stability is far from assured beyond the conclusion of the current pace of buying, which is why the Fed discussed the possible need to bolster its commitment.
Eurodollar futures have erased earlier losses with the very front end futures flat on the day with two-to-three tick losses apparent from March 2011 onwards.
Japanese futures – Yields on JGBs matched yesterday’s peak after the new Finance Minster Naoto Kan let it slip that he would prefer to see a weaker yen. Investors fear that his policy stance might include a less hawkish stance than that of his predecessor. The March JGB lost 35 ticks to 138.76 with the yield finishing at 1.33%.
European short futures – An easier tone to the cash market continues in the aftermath of December’s year-end liquidity generosity from the ECB, which has helped boost Euribor futures today. The short end of the strip is up by around four basis points across the curve. The December expiration contract is trading at a yield of 1.7% and compares to a current three month cash Libor of 0.692%. Setting a positive tone also was the release of weaker than forecast retail sales data across the entire Eurozone for December. The number showed a 1.4% monthly decline in the key retailing month of the year when best hopes were for an unchanged reading.
British interest rate futures – The Bank of England’s decision to leave its policy setting unchanged today was as expected. The fundamental situation is shifting nowhere for Britain and the economy could do with a dose of good news. However, the investment theme remains weakened by an ongoing negative political situation as the latest bout of in-fighting within the ruling but fast-fading Labor party is undermining the Prime Minister as he launches a summer election campaign. There is currently a greater focus on the prospects for the pound rather on interest rates. While investors possibly fear rising yields around the world (including British yields) they are positively more sanguine on the timing of a hike in official rates from the Bank of England. March gilts are flat at 114.04 and sterling futures are between four and six basis points higher at the front end.
Australian rate futures –The Australian yield curve was pulled in all directions overnight in response to a firmer Aussie dollar, before it eased significantly to the U.S. dollar. As a barometer of the health of the Pacific and Asian trading nations the Aussie has been setting big highs against the pound, euro and yen recently as the region looks to be in rude health. Yet following such a health check the Chinese appeared to somewhat check progress today by lifting a key interbank interest rate and supporting a recent comment that it needed to combat inflationary concerns. Meanwhile Aussie bill futures slipped sending yields between four and six basis points higher in yield following a rather strong retail sales report. The implication is that the RBA may well take a second look at the need to lift interest rates for a fourth time in February. Bond yields actually eased by a basis point to 5.63% as the curve flattened.
Canada’s 90-day BA’s – Ahead of key labor market data for both nations on Friday, Canadian government bond prices are lower by 24 ticks to yield 117.81. Bills are trading a little more cautiously ahead of a possible second month of employment gains for Canada following the addition of 79,100 jobs in November. The market is expecting a 20,000 gain in jobs for December, which would mark the fourth net monthly add in five.
Andrew Wilkinson
Senior Market Analyst
Interactive Brokers Group
