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

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(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.

by Mike Larson 03-05-10

Boy are things getting ugly in the U.K. The British currency, the pound, is getting crushed. The price of long-term British debt securities, called gilts, is heading down. And the cost of default insurance on the country’s debt is rising steadily.

My takeaway: This is but a preview of what’s to come here in the U.S.

Why the Crisis Is Coming
To a Head in the U.K.

Britain’s finances are in shambles. The country’s budget deficit is running at more than 12 percent of gross domestic product, roughly the same as in Greece. In fact, for the first time, the country recorded a whopping $6.7 billion deficit in January … much worse than the $3.9 billion SURPLUS economists were expecting.

The U.K. government is planning to sell $349 billion in debt this year, the most ever, to cover its deficit. But demand is flagging, with foreign investors dumping the most U.K. sovereign debt in nine months in January and yields generally rising.

Then a few days ago, the crisis came to a head. The catalyst: New polling data that threw the British political outlook into chaos. Polls showed that the Conservative Party’s lead over the Labour Party shrunk to its lowest level in more than two years.

It now appears that neither party could come out of spring elections with a clear majority, leaving the U.K. with a “hung” parliament. That would make it much more difficult for the government to reduce the nation’s debts and deficits.

Investors are becoming more afraid of British debt.

With all of that, it’s no wonder …

• The British pound plunged six days in a row, its longest series of declines since October 2008.
• The yield on 10-year U.K. government debt recently hit 4.27 percent, compared with a low last fall of 3.44 percent.
• The cost of protecting against a British debt default in the credit default swap market surged to more than 101 basis points, or $101,000 per $10 million of debt. That’s up from around 44 bps in the fall.

Striking Similarities …

You don’t need a Ph.D. in economics to see the striking similarities between the situation in the U.K. and the situation here in the U.S. …

• Our debt situation is totally out of control, with the national debt on track to double over the next decade to almost $19 trillion.
• Our budget picture is a mess, with $8.5 trillion in deficits projected over the next 10 years.
• Our foreign creditors are starting to sell our bonds, with China alone dumping $34.2 billion of Treasuries in December, the most ever.

And politically, we’re facing the same gridlock and inaction as the U.K.
Just look at the deficit commission nonsense …

“The sovereign debt crisis is subprime all over again.” — Bill Gross, manager of the world’s largest mutual fund.

President Obama had to create an 18-member panel by executive order because Congress voted down an earlier proposal. Since it’s a presidential commission, Congress can just ignore any findings. And those findings won’t even be released until December 1, for purely political reasons (that’s after the mid-term Congressional elections).

Lastly, just like the U.K., we have bailed out, backstopped, or otherwise taken over so many institutions and segments of the capital markets that our own balance sheet is getting shakier and shakier.

As PIMCO Chief Investment Officer and “bond guru” Bill Gross just noted in a monthly commentary:

“If core sovereigns such as the U.S., Germany, U.K., and Japan ‘absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.”

Bottom line: We’re running this country’s finances off the rails. And just like in Greece … Ireland … Spain … and now the U.K., it’s going to come back to haunt us.

So consider dumping your long-term U.S. bonds, and buying some gold as a hedge against global debt and deficit problems. Or if you’re more aggressive, check out a service like my Crisis Opportunity ETF Trader, where my subscribers are positioned to profit from this unfolding fiscal nightmare.

Until next time,

Mike

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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.

Tuesday, March 2, 2010

The money market response to an upbeat policy statement out of the mouth of the Bank of Canada was pretty bearish with bills of acceptance slumping by one-eight of a percentage point. Dealers took the view that the Bank is indeed likely at some point in 2010 to start raising interest rates. The Canadian currency jumped in response to a perceived growing yield cushion against the dollar with local exporters far more likely to benefit from what the Bank of Canada referred to as strong domestic demand in many emerging market economies.

Canada’s 90-day BA’s – December bills dropped 11 basis points to 98.69 to imply a year end three-month cash yield of 1.31%. The benchmark short cash rate was left untouched at 0.25% but the upbeat statement from the BoC left dealers in the frame of mind that tightening will happen as the recovery continues. Bond yields actually dipped one basis point to 3.39% possibly on account of the note from the Bank that a rising dollar has the persistent impact of constraining inflationary pressures. The bottom line is that prevailing stronger economic activity and prospects are tipping the market towards an expectation of tighter monetary policy.

Eurodollar futures – June bonds became the lead month today as we approach delivery of March notes. The contract is trading either side of unchanged as investors see a relatively muted inflationary profile with a need to keep an ongoing watch on the situation in Europe. Eurodollar futures are not paying much attention to the overnight comments from Philadelphia Fed President Charles Plosser who said he’d rather the fOMC ditch its “extended period” terminology. The words gave a caffeine boost to the dollar earlier but as a non-voting member at the Fed, we know his hawkish words are not shared by more important voting members on the basis of recent speeches.

European short futures – Euribor futures are unchanged across the strip. On Thursday the ECB gets to air its latest views on whatever subject it chooses to. Factors important today are the state of play in EU negotiations with Greece over budgetary controls as well as the roadblocks the furor raises as the ECB attempts to step back from its emergency exit strategy.

March bunds are 10 ticks lower at 124.23 where the yield is 3.12%.Greek Prime Minister George Papandreou is scheduled to meet the German Chancellor Angela Merkel on Friday. It’s still unclear whether we will ever hear of an emergency fund or plan to support Greece even in the event that it takes each and every measure suggested by the EU Monetary Commissioner Ollie Rehn who flew to Athens at the weekend.

British interest rate futures – A good auction of gilts has the bond bulls out in force buying government debt today. The June gilt future rallied sharply after the auction to yield 4.03% with the future adding 52 ticks on the day to 114.55. Short sterling has precious little to react to and is unchanged across the curve.

Australian rate futures –The RBA indeed raised its short rate to 4% and said that average borrowing costs still remained historically low. Inflation is now likely to be consistent with its official target, although that doesn’t mean that risks are balanced, that would be a signal that rates are on hold. Given that the market is still looking for a further 1% as the economy simmers, 90-day bill futures continued to fall by about three basis points. The March 2011 maturity settled unchanged at 94.77 to imply a yield of 5.23% before the time the RBA has finished tightening. The 10-year government bond shed five basis points to 5.28% as the yield curve flattened. In a sign of robust demand for its resource exports the Australian Bureau of Agricultural and Resource Economics today forecast demand would grow by 15%to A$187 billion in the 12 months ending June 2011. The record of A$197 billion was set in the 2008/9 period also ending in June.

Japan – Yields fell one basis point at the 10-year where they stand at 1.28% and on the threshold of the lowest in many weeks. With Asian stocks remaining firm for two days in a row, it’s strange to see bonds and stocks rise together.

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.

Wednesday February 25, 2010

Global yield curves are marginally flatter at the end of a week that delivered fresh economic worries around the world, compounded by fresh signs of smoke in Europe where investors responded to threats of a Greek downgrade. Long yields are firmer in price while short-dated futures contracts are lower by a similar amount. The net effect confirms the response towards flatter yields seen during the week. Interest rate expectations continue to focus on near-zero rates for an extended period.

Eurodollar futures – It’s hard to determine what reaction interest rate markets should have to Friday’s GDP report. The expected upwards revision to fourth quarter growth was in-line with expectations at 5.9% and higher than the preliminary 5.7% reading. The improvement stemmed from a sharp reduction in the pace of inventory declines as businesses realized that stocks were already mean and lean. Final demand data was actually revised lower and portrays a slightly more docile consumer than at first blush. So we have a blistering headline rebound weighed upon by lackluster consumer spending. More recent data has also raised eyebrows as fresh weakness is apparent in the housing market where data for construction and transactions are both pointing to another tepid spring for realtors and builders.

Existing home sales in the U.S. fell 7.2% in January bringing the annualized pace to the lowest reading in seven months. Meanwhile a University of Michigan consumer sentiment reading for February declined at the margin pretty much in line with market expectations. All of today’s data gives cause for bonds to keep a positive tone sending yields lower. Meanwhile the weaker consumer confidence data and lacking conviction in the housing market was enough to swing Eurodollars from minor intraday losses to gains. March treasury note futures are eight ticks higher at 118-25 to yield 3.62%. The December Eurodollar contract is trading at an implied 0.81% yield.

European short futures – German bunds are pushing intraday heights heading into the final hours of European trading. The March contract is up 14 ticks at 124.44 and is challenging the 124.52 peak of February 2 as investors worry about weekend prospects for negative weekend developments on the Greek story.

British interest rate futures – British growth was also revised higher earlier today with the fourth quarter expansion lifted to 0.3% from 0.1%. But a downward revision to the third quarter data meant a large final quarter contraction of 3.3% compared to the 3.2% announced last month, which offset today’s better data. March gilts are ending the session just about unchanged at 115.75 while short sterling futures are about two ticks weaker in price.

Australian rate futures – Aussie bills also dipped just slightly ahead of next week’s RBA meeting at which dealers’ expectations over an interest rate increases are evenly split. Firm data from Japan overnight indicates ongoing Asian market recovery.

Canada’s 90-day BA’s –Canadian bill futures are unchanged to higher along the strip with government bond prices once again on the rise as yields fall as the yield curve continues to flatten.

Japan –A recovery for stocks domestically and firm retail sales data helped confidence return a little to Japanese markets. Eyes continue to remain fixed on the Toyota recall. Today’s strong reading for industrial production showed a gain for January of 2.6% blowing away a 1.1% forecast but was not enough to change 10-year note yields standing at 1.30%.

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.