Easing Eurozone tensions push bond yields higher

Wednesday, March 10, 2010

Former Italian Prime Minister and no stranger to yawning fiscal deficits, Romano Prodi said earlier today that the Greek crisis is over. Having weathered the storm and with less time pressing their own fiscal agenda, the former President of the European Commission said that other lesser indebted Eurozone nations will be spared the Greek-style drama. Signor Prodi sees no reason for other Eurozone members to falter from this point.

European short futures – While it took the euro some time to find its legs in the wake of his comments, credit default swap prices took a nosedive and peripheral debt spreads against core German bunds narrowed.

Although June German bund prices reached an intraday low at 122.68 shortly after U.S. equity markets officially opened, peripheral nations’ bond prices are seeing limited losses. The premium investors paid to hold Greek 10-year debt narrowed relative to bunds, declining by 11 basis points to 280 basis points. During the crisis the spread blew out to 280 basis points. Portuguese debt, subject to resurfacing downgrade speculation this week narrowed to 114 basis points while Italian and Spanish debt also saw premiums narrow to 94 and 91 basis points respectively.

German debt prices rose earlier in the day after weaker trade data at the turn of the year from the largest member of the Eurozone. A contraction of 6.3% in exports eroded the deficit to €8 billion. Euribor futures are a shade lower on the day despite the ongoing provision of abundant short-term liquidity.

Eurodollar futures –Soothing words yesterday from a New York Fed markets official spurred gains in Eurodollar futures. But the gains are giving way marginally today despite further encouraging words from Chicago Fed President Charles Evans. He stated that rates would be kept low in his opinion for at least three or four more meetings. Perhaps his words are less soothing in so far as they put monetary tightening back on the 2010 agenda. The curve is steepening a little this morning with 10-year yields higher by 3 pips at 3.73% and the two-year yield up two pips at 0.89%.

Canada’s 90-day BA’s – June government bond futures slipped 17 ticks to 117.85 sending yields higher by three pips to 3.53%. Bill futures price dropped harder than Eurodollars sending yields higher by four basis points across the curve.

British interest rate futures – Further evidence of uncertainty in the U.K. arrived in the shape of the first decline in five months for manufacturing output. That drop in the data was unexpected but confirmed weakness in demand across the continental economy. Short sterling futures rallied by about four ticks on the news while the June gilt contract slipped by 14 ticks to 114.32.

Australian rate futures – A surge in Chinese export data for February confirmed strong Pacific and Asian activity just as the Reserve Bank’s assistant Governor was priming the nation for above average growth for the next several years. Ahead of tomorrow’s employment report expected to show employers added 15,000 new jobs, money traders sold bill futures propelling yields higher by as much as 10 basis points. Two year bonds added five basis points to stand at 4.76% while 10-year notes maintained a yield of 5.53%.

Japan – JGB futures rose on the weakness in capital spending delivered in a 3.7% decline in machinery orders data. June JGP futures added 12 ticks to 139.42 where the yield slipped to 1.29%.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

8 Greenwich Office Park, Greenwich, CT 06831

(203) 618 8085

Sterling under more pressure

Tuesday,  March 9, 2010

Ongoing speculation that profits earned overseas by Japanese companies is finding its way home before the fiscal year-end is lifting the yen on Tuesday. At the same time Asian stocks are commemorating the one-year anniversary of the lowest closing point of the bear market for stocks with a down day, also providing a knee-jerk bid to the Japanese yen. Other Pacific region data suggests, however, that risk appetite is likely to remain on the agenda and may provide the Australians with another reason to lift rates. But the main story today surrounds the British pound where the bad news just keeps piling up.

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British pound – Comments from two ratings agencies helped keep the pressure on the pound today while warmer words from one of the MPC members helped stem some of the pessimism. Kate Barker addressing an NIESR audience said that recent data provided grounds for optimism that the British recovery was “broadly on track” and pointed to the gradual disappearance of several of the negative factors holding back the recovery. While admitting that the economy still looks fragile Ms. Barker noted that the downside risks to growth had diminished leaving a still bumpy road ahead.

Speaking on a day when data proved a further weakening of the U.K. trade deficit for January on account of lower chemical and commodity sales, Ms. Barker said that the British economy was failing to feel the potential impetus from weaker sterling. She noted that the British economy was faring no better than either German or French manufacturers presented with the onset of recovery. Her fear is for significant ongoing weakness in Britain’s trading partners that would prevent any benefit from a cheaper pound.

Meanwhile the pound fell against the dollar to $1.4971 and above last week’s 10-month low after Fitch Ratings agency advised that the government needs to accelerate its plans to reduce the budget deficit. Reflecting momentarily on that prospect, investors quickly connected the dots to see that a rudderless government is the most likely outcome in the forthcoming election, further hampering sterling.

Moody’s Investor Services separately cautioned that as the tide of government support for the U.K. banking system slowly ebbs out, it will leave exposed those financial services companies that have failed to improve their funding position. The reports together were taken negatively by sterling today which also fell to 90.61 pence against the euro.

Euro – Having risen to $1.3700 on Monday the euro is back on the defensive today and retreated to an intraday low at $1.3550. Most recently the single European currency traded at $1.3558. It also shed ¥1.3 to stand at ¥121.73. Friday’s low against the dollar was at $1.3530 and only if the euro can hold above here will it start to look constructive.

U.S. Dollar – A Manpower Inc. survey suggests that the recovery in employment is expanding into the second quarter, while jobs growth across emerging markets is also likely to continue its expansion. The world’s second-largest temporary employment agency said that of 18,000 surveyed companies, 76% leave hiring intentions unchanged between April and June while 16% said they’d expand the number of workers. The most optimistic response came from companies located in the North East. Within emerging markets it’s no surprise to learn that hiring intentions were strongest within nations such as Brazil and India, while they were the weakest in Italy, Spain and Ireland. Some analysts claim that without the adverse impact of winter snowstorms, the February reading of U.S. employment would have shown jobs added. Previous data during disrupted winters have shown sharp rebounds in job additions during March. The ongoing U.S. economic recovery is bolstering the dollar under current conditions.

Japanese yen – We’ll just have to wait and see how far the yen rises in response to the seasonal impact of repatriation. With global equity markets around 60% higher than this day a year ago, the world is in far fitter shape and the recovery remains encouraging. And so the premise that the yen is rising on a risk aversion theme has to go down as a somewhat bogus claim today. We await any word from the Bank of Japan, which is supposedly mulling ideas on how to breathe life into the Japanese economy. The impact of further quantitative easing via additional government bond pressures should serve to weaken the yen, which currently stands at ¥89.75 against the dollar.

Aussie dollar – A buoyant ANZ job survey for February made the previous month’s downturn appear to be little more than an aberration. The measure of newspaper advertisements and Internet job listings increased 19.1% – the largest jump in the reading since it was first compiled in 1999. The data comes days ahead of the February employment report, which might prove so strong that it will prevent the RBA from taking a breather after its February interest rate hike to 4.00%. The Aussie unit jumped in the immediate aftermath of the data and reached 91.17 U.S. cents. However, a reversal in attitude towards risk later saw the dollar and yen both rally sending the Aussie back to a low at 90.56 cents. The Aussie is currently trading at 90.76 cents, while it’s lower on the day at ¥81.50 against the Japanese unit.

Canadian dollar –The Canadian dollar remains just a fraction of a penny above 97.00 U.S. cents this morning and has lost some impetus on account of a gentle decline in key crude oil and gold prices. Gold has slipped by $11 per ounce while crude at $80.25 per barrel remains north of psychological support at $80.00.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

8 Greenwich Office Park, Greenwich, CT 06831

(203) 618 8085

Global optimism spurs weaker bond prices

Monday, March 8, 2010

Bond traders are in no mood to be the last one out of the exit today. Friday’s U.S. employment report provided enough reason to start lightening the safe-haven payload of government debt, while the support from French President Sarkozy for the government of Greece was enough to spark a risk revival in equities, commodities and riskier currencies. Such a move argues against the recent bid to bonds and as such 10-year yields are higher across the board, except for those of Greece and Spain.

Eurodollar futures –Former Fed Chairman Paul Volcker speaking in Germany at the weekend argued that now is not the time to dispense with either fiscal or monetary efforts to spur demand. Nevertheless, a revisit to breakeven for U.S. equities for the year based upon building confidence that there is sufficient momentum to deliver a sustainable economic recovery is helping drag bond yields higher. The 10-year yield rose three basis points to start the week and is sitting at 3.71% as the June note future slipped seven ticks to 116-26. Losses for Eurodollar futures are larger at farther maturities with three tick declines evident from June 2011 outwards.

Canada’s 90-day BA’s – The spread between U.S. and Canadian 10-year bonds is once again widening as yield increases are more evident in American government debt. The Canadian dollar has held firm against its U.S. counterpart as investors warm towards the more fiscally sound properties of the Canadian government’s measures. Nevertheless, bill prices are down harder than Eurodollar futures today possibly because rising commodity prices are a sign that a recovering economy may well deliver harsher monetary measures sooner rather than later. The spread between June and December bills continues to stretch wider as a result with the spread of 84 basis points indicating three quarter point rate increases during the second half of 2010.

European short futures – Euribor futures are a little brighter this morning and it is the back end of the curve where the relief pressures are being felt. With money traders concluding that the fallout over Greece will ensure a slower pace of growth, no one is expecting the ECB to raise rates anytime soon. But June bund prices slid earlier as yields rose to 3.18%. Losses have subsequently been curtailed with the June contract having rebounded from an intraday low of 122.26 to stand at 122.46.

British interest rate futures – All is well in the U.K. today. Stocks are up, the pound is perkier and sterling rate futures indicate that the Bank of England can take a nap for the foreseeable future. Gilt prices fell sharply earlier and the June contract slipped to a low of 113.83 at its worst point of the day. The 10-year yield stands at 4.10% and higher by four basis points on the day. Two weekend polls indicated a widening of the opposition Conservative party’s lead over the government heading in to the summer election.

Australian rate futures –Rising regional equity prices and a jump in commodity prices helped depress interest rate futures. The 10-year Australian government bond yield jumped to reflect losses it missed out on after the U.S. employment report. Yields rose 10 basis points to stand at 5.55%. Meanwhile, ahead of its own labor report later this week, 90-day bills slumped up to 10 basis points.

Japan – Government bond yields rose one basis point taking a cue from declining bond prices around the world. Last week’s Nikkei newspaper reported that the Bank of Japan would this week mull any additional measures it could possibly take to help rescue the ailing economy. March JGBs declined just two ticks to close at 140.17.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Bonds slide after jobs data

Friday, March 5, 2010

Japanese and Greek bond prices proved exceptions to a wholesale slump in global bond prices following a stronger than expected U.S. jobs report. The Japanese central bank is apparently set to mull measures that would in some way further ease already wafer thin interest rates while a restoration of confidence after an austere Greek budget created thrice as many willing lenders to bid for a €5 billion 10-year bond auction on Thursday.

Eurodollar futures –About half as many lob losses as feared in February helped deliver a bearish signal for bond traders on Friday as 36,000 jobs were lost, while an upward revision to manufacturing labor data saw that sector eek out a third monthly employment gain. A separate household survey showed that the unemployment rate did not rise as expected, rather it remained unchanged at 9.7% for the month. Evidence of a weather-related job loss was scant as a reading of average hours worked fell by a minimum. Economists will surely be looking for a weather-related jobs rebound next month.

The yield curve stretching from two-to-10 years rose in parallel by around six basis points. At this stage the bullish data is being treated with caution. Let’s not forget that a net number of jobs were still lost in February in addition to 6.8 million lost since December 2007. Indeed speeches presented by two Fed speakers yesterday confirm that they’d not be in rush to change the current accommodative stance on the evidence of a single piece of data.

Chicago Fed President Evans wants to see “highly sustainable growth” before he’d support any move away from low interest rates, while St. Louis Fed President Bullard noted that the early stages of recovery will still warrant further accommodative positioning for some time. These remarks today appear to counter the inevitable drop in Eurodollar futures prices, where nearby expirations have seen implied yields add two basis points while far-dated maturities are approaching yield increases of 10 basis points. The one year June calendar spread widened out to 125 basis points while the same September spread widened to 138 basis points in light of today’s events.

Canada’s 90-day BA’s – The Canadian jobs report typically coincides with the release of the U.S. jobs data. Today, however is one of those sessions when the data is deferred for another week. Still, the robust nature of recent growth and the fact that Canada is more dexterous as it’s a smaller nation has ensured that today’s decline in Eurodollar futures is mirrored in Canadian bill futures. The yield on the 1-0year government bond rose by just three basis points to 3.43% as June futures slipped 25 ticks to 118.51. Meanwhile bill prices for December and latter maturities fell by five basis points and more on Friday.

European short futures – Despite a Thursday announcement from the ECB that it will maintain highly liquid conditions for approximately another six months, the short-term trend is towards marginally higher yields according to the euribor strip. What’s important to consider now that the Greek budget has been approved and has received wide respect, is that much of the recent surge in German bund prices is likely to unwind. In line with weaker U.S. fixed income prices today, March bund prices are 30 ticks lower at 123.99 to yield 3.16% having rejected panic lows last week in yield terms at 3.08%. Euribor contracts are lower by just a couple of basis points.

British interest rate futures – The story is pretty much the same for British fixed income prices with no domestic data to drive affairs. Short sterling futures are weaker in line with euribor prices and the curve is marginally steeper. June gilts slipped 35 ticks in late trade with the yield rising three basis points to close the week at 4.03%.

Australian rate futures –Favorable price action for Asian stock markets boosted by the promise of accommodative monetary policy from its largest trading partner, China, helped maintain a weaker bias to fixed income prices. Bills eased by a couple of basis points with bill yields rising six basis points across the strip. Meanwhile government bond prices fell to send the 10-year yield higher by one pip to 5.45%.

Japan – Despite that boost to regional equity prices, Japanese government bonds rose sending yields towards the lower end of the recent range at 1.29%. According to sources the Bank of Japan will next week mull how it might further relax already extremely accommodative monetary policy conditions in order to satiate government calls for help in staving off further deflationary waves.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Bonds respond to rally in dollar

Thursday, March 4, 2010

Bond prices are staging a late afternoon rally in Europe and an out-of-the-blue surge in the value of the dollar is creating a sense of rising risk aversion. The Greek budget appears to have found the support of various factions across Europe and a sense of calm had returned to markets today.

Eurodollar futures –A decline of 29,000 in the weekly initial claims data on Thursday allowed pressure to build on Eurodollar futures as bond yields continued a gentle climb. The fall to 469,000 initial claims through Saturday helped somewhat soothe investors’ fears that the nascent recovery in the labor market had stalled prematurely. Better news was evident in a reading of continuing claims, which declined by 100,000 to 4.5 million. Dealers now await the official data on Friday, which is expected to show a decline of 59,000 jobs. We await better weather in order to iron out the quirky nature of current data.

With equity markets continue to improve and the ongoing Eurozone mess creating a roadblock to both growth and a removal of liquidity measures, interest markets are fast concluding that the world can only get better based upon the current direction of growth. Investors eyeing a 2.5-3.5% GDP range for the United States this year are starting to sense that such a scenario will inevitably lead to a removal of low interest rates at some point. The bias towards higher rates appears to be drawing more investors’ thought process with deeper ongoing losses for deferred futures contracts than at the short end. Today June and September expirations are two-to-three basis points lower in price while further maturities are lower by five-and-a-half pips forcing the curve to steepen. June treasury note futures are rallying off earlier weakness and stand at 117-12 to imply a yield of 3.62%.

Canada’s 90-day BA’s – The last time September Canadian bill futures traded with a yield above 1% was January 20. During the last five sessions yields have risen by almost one-quarter of a percent as dealers respond to a variety of driving news. The Bank of Canada is upbeat and its view is underscored by strong growth and a faster than anticipated return to the target rate for inflation. The market today predicts that within one year the three month cash rate will have risen from 0.5% to 1.85%.

European short futures – The ECB left rates unchanged and after the Greek budget there is a bit of an easier tone. It would seem that the danger of a Greek collapse has now passed and by making the Greek government hold its hands over the fire, the EU has helped forge a sense of reality delivered by the austere budget. The Greeks responded today by announcing the issuance of €5 billion of euro-denominated bonds at 300 basis points over German debt. The end game here is to create the conditions that allow the government to finance its debt needs. Some of that must come from budget measures and some must now come from the market. There is no sense in brandishing those investors who tried to ditch the euro currency in hopes that things would blow apart. And it appears that business may be getting back to normal.

British interest rate futures – the Halifax reported weakening home prices for February, while the Bank of England revealed no changes to either monetary or its quantitative policy today. Gilt prices continue to rally in late afternoon trading with the June contract 21 ticks higher at 114.67. Short sterling futures meanwhile are around three basis points lower in price.

Australian rate futures –Bills prices dipped by a basis point while government bond prices advanced to shave two pips off the 10-year yield, which fell to 5.47%. Shanghai stocks slumped 2.4% as a major bank announced that 2010 new lending would be half of the 2009 rate. Meanwhile a narrowing in the trade deficit showed iron ore exports were especially strong in January.

Japan – Barely a budge in the JGB yield down to 1.315% as stocks eased 1% in the Far East. Capital spending data showed a – 17.3% decline for the final quarter of the year – not as bearish as the 18.4% forecast.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com



Wednesday, March 3, 2010

Just when investors thought it was safe to jump back into the safety of fixed income, along comes another grain of truth to scotch the theory. Recent data proved perhaps a slowing appetite for mortgages as the sagging housing market barely budges, while consumer and investor sentiment has been sidetracked by inclement weather equally responsible for keeping workers at home and in some cases out of work. The crescendo in the Greek situation has also added to risk aversion sending yields lower and creating worries about the arrival of double-dip recession. The improvement in today’s American ISM data was therefore a little bit of a shocker and adds weight to Friday’s key employment report.

Eurodollar futures –Bond futures came under pressure sending the yield on the 10-year note to 3.65% after the composite reading of the non-manufacturing ISM survey came in at a more expansive reading of 53 compared to the marginal expansion witnessed in January at 50.5. A reading above 50 signals expansion and below indicates contraction. The predicted reading for today’s report was 51. Nervousness about the state of the labor market grew following a jump to a three-month high for initial claims last week. Some reckon that this is a backlog owing to weather-related issues. Thursday delivers a fresh look at the same number. Today’s ADP survey of private employers showed another 20,000 pace of losses and does not cover government hires. This precursor to the BLS data this Friday actually bodes well for an improving labor market and now has bond traders caught in the crossfire of what they felt was a deteriorating economy, which has more recently received contradictory data.

Not much change, however, for Eurodollar futures, which are higher at nearer maturities and ever so slightly lower at deferred maturities. As a result the recent curve flattening is turning somewhat with the June10/June11 strip widening back out from 114 to 117 basis points this morning.

Canada’s 90-day BA’s – Money markets are now entering a minor panic phase over the prospects for possible interest rate increases later in the year in Canada. The response to unchanged monetary policy delivered with Tuesday’s monthly statement was unusually bearish for interest rates. However, a far more upbeat view on what the Bank referred to as a vigorous pace of domestic spending and a further recovery in export markets has taken its toll on expectations. In addition the Bank no longer made reference to any slight downside risks to inflation nor output. That fact was made all the more believable by a Q4 GDP report revealing a 5% pace of expansion while the rate inflation is already back to the 2% target.

And while the central bank extended its pledge to maintain cheap money through June, investors are wasting no time discounting the time when the BoC will address an exit strategy for an ultra-low policy setting. Since Friday, the December 2010 three-month BA contract has lost 21 basis point sending up the implied yield to 1.40%. At the start of the month as global recovery looked threatened the yield slumped to 1.16%. The same June10/June11 calendar spread referred to above for Eurodollars has surged from 142 basis points wide earlier in the week to 160 points as traders sell deferred contracts harder. The easy money trade in this environment suddenly becomes the classic curve steepener.

European short futures – Euribor futures have a slightly softer tone in light of the Greek budget that delivers a package of spending and revenue reductions equivalent to 2% of GDP. The ramifications of the entire Greek drama have been felt Eurozone wide not least in terms of exchange rate pressure, but it’s also raised the demand for core government bonds. Today the market welcomed the Greek package by reducing the yield on its government bonds. The 10-year yield fell 18 basis points to 5.96% while the premium that buyers demand over and above German bunds slipped by 20 basis points during the session as investors sniff resolution in the air. If Athens can appease both Berlin and Paris by demonstrating actionable and feasible deficit reduction plans that allows pressure on the Eurozone to subside, there is a far greater possibility that the EU will stand ready to buy new Greek issuance as slugs of maturing bonds turn up over the next several months. March bunds slipped 15 ticks to 124.05 where yields rose to 3.13%.

British interest rate futures – British yields remained unchanged at the long end of the curve as investors wrestled between the potential for a weak incumbent government after a likely May election and recent well received auctions. Short sterling futures are lower in line with euribor but also weakness at maturities into 2011 and beyond. The June10/June11 calendar spread recently traded at 105 basis points but has today reached 120 basis points. While investors were recently burned in trying to nail 2010 as being the year of central bank tightening, it appears that they are taking advantage of recent curve flattening as rationale for trying to predict that 2011 will most certainly see the removal of the punchbowl. If that’s the case then curve steepening is the order of the day of such recent flatness.

Australian rate futures –Bills continued to fall midweek. Asian and Pacific markets remain robust and there is little fresh impetus to draw the crowd to fixed income right now. While the RBA gave the impression in its monetary tightening yesterday that it wouldn’t seek fresh rate increases at each meeting going forward, it has stopped short of declaring balanced risks, which would signal it knows not whether the next move will be higher or lower. In that regards market expectations for more monetary tightening later remain appropriate. Bond yields rose four basis points while yields on bills rose by a similar amount.

Japan – Expectations for a weak capital spending report overnight and the fact that recent government bond auctions have been well received kept the yield on JGBsstatic at 1.32% today.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

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.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.