IB Interest Rate - Brief Yields continue to unwind ahead of key NFP

Thursday September 2, 2010

There was little to read into Thursday's initial claims report ahead of an expected 100,000 dip for U.S. employment throughout August. Yet the better tone indicated by the health of global manufacturing and what earlier appeared to be a bolt-out-of-the-blue in the shape of returning consumer confidence continues to weigh on bond prices. For a second day yields are moving rapidly higher.

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Australian bills - Short-dated yields down under continued to rise for a second day as investors took back part of the huge decline in yields that accelerated earlier in the week. The following chart depicts the three-month change in the yield structure of the Australian curve. Two things are evident from the picture. First, the outright shift higher for futures prices shows a commensurate 60 basis point yield decline at the December 2012 maturity. This indicates that dealers have reined in their expectations over future action out of the Reserve Bank. A weakening of Asian growth spearheaded by cooling measures in China have questioned the future pace of expansion in Australia, where exports are critical drivers of overall GDP. Data today showed July as the weakest value for exports in five months. Second, the curve has flattened markedly and again indicates less fear of monetary tightening. The December 2010/December 2011 calendar spread for example indicating where investors expect the gradient of the curve to be by year end has narrowed from around 50 basis points to just seven today.

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Aussie bond prices managed a small gain overnight ignoring a midweek slide for European and American credit markets. The 10-year government bond yield slipped by two basis points to stand at 4.837% while 90-day bill yields rose by five basis points.

Eurodollar futures - Eurodollar futures are pretty much unchanged and were unaffected by an earlier nudge lower in weekly initial unemployment claims. Despite an upwards revision to last week's data, the decline in claims through last weekend to 472,000 compares to a sticky four-week moving average of 485,000. Continuing claims also declined by 23,000 to 4.46 million. Traders remain on edge ahead of the August employment report, which is expected to show a further net loss of jobs as the government unwinds its census program for which many temporary jobs were created. The December note future is three ticks lower after a severe decline yesterday with its yield today four basis points higher at 2.613%.

European bond markets - September bunds have now shed almost two big figures since the start of the week and today stand 39 pips lower at 132.84. The ECB today announced ongoing initiatives confirming that they would extend cash on a one week and monthly basis through January 18, while three month loans will be made during October to help hurdle the traditional year end liquidity crunch. At the ECB press conference Mr. Trichet settled for the word "moderate" to describe the Eurozone's recent recovery, which remains good enough to sour dealer appetite for fixed income after surprisingly healthy U.S. data earlier in the week. The yield on 10-year government paper continued to move away from record lows recorded earlier in the week gaining four basis points to stand at 2.25%.

Canadian bills - Canadian bill prices eased by up to three basis points along the curve. The domestic economic recovery suddenly feels that bit better after two positive shocks to U.S. data. Canadian 10-year bond futures managed a small gain with the contract adding one tick to 125.37 leaving yields at 2.87%. The August employment report won't come out until one week from tomorrow.

Japanese bonds -Japanese bond prices slumped for a second day as investors warmed to Japanese stocks leading the Nikkei to a 1.5% gain overnight. 10-year yields surged a further five basis points in response to good news for the health of the global manufacturing sector.

British gilts - Weakening British data helped short sterling futures manage a minor rally while the dip in a report of home prices issued by the Nationwide Building Society still couldn't spare the gilt market from becoming embroiled in the global backlash on yields. The December gilt future slid by 23 ticks to 124.05 to yield 2.946%. Signs of further threats to the recovery were also evident in a PMI construction survey also recoiling from strength earlier in the summer.

Andrew Wilkinson
Senior Market Analyst ibanalyst@interactivebrokers.com

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