Tuesday November 24, 2009

In our earlier FX View I noted that the dollar had failed to benefit for more than a microsecond on several emergent reports questioning banks' capital adequacy. Chinese state-owned banks have to consider raising more capital after strong lending depleted capital ratios. We can think of worse circumstances for needing more capital.

Rather the topic is a rear view look at the progress made by central banks in their efforts to shore up the global banking system. While the dollar is back to unchanged against the euro and down against the Japanese yen, global 10-year notes are higher on the session but are having a tough time breaching recent highs, indicating perhaps that the rally spurred by investors expecting rates to remain lower for longer is running out of steam.

In addition to questions raised today by Chinese banking regulators, the Fed is also reportedly asking for plans to be submitted from TARP recipients. The question for banks such as Bank of America, PNC and Citigroup Inc. is whether they have raised additional capital since receiving a government package and whether they would continue to exceed capital buffers in the event that they repaid the government. Rather than taking today's story as a negative, the market should really be looking for signs of consistently strengthening recovery.

Following a revised American GDP report, which showed third quarter growth came in lower at an annualized 2.8% after an initial reading of 3.5%, interest rate futures have maintained slightly higher prices (lower yields).

Across the globe, on a very quiet data day, interest rate futures depict the same picture with marginally lower prices at the front of the curve and gains further out. Such a move tells us a couple of things. First, that cash is possibly incrementally higher in the money markets, while second, the for want of a better direction the market wants to continue stretching out its expectation that rates will remain lower for longer.

March Eurodollar futures are unchanged carrying a yield of 0.34% this morning, while the deferred March 2011 contract is 5 basis points higher to yield 1.52%. The December t-note is at a session high now with investors likely focused on the PCE deflator data within the GDP report, which was equally revised lower to show prices rising at 1.3% quarter-over-quarter. Friday's high of 119-29 represents resistance if yields are going to slip below the current 3.33%.

European interest rate futures. Interest rate futures failed to take much notice of an earlier strong showing from the Munich-based IFO institute's sentiment index, which rose to a 15-month high. While the German bund did stop in its tracks, the short end failed to get caught up in the risk aversion sentiment. The December bund contract is up 17 ticks at 122.62 and has taken out Friday's high since the U.S. GDP report, but still has to take out 123.00 to become more bullish. March euribor is trading unchanged at 0.87% while the March 2011 contract is lower in yield at 2.04% this morning.  

British rate futures are higher by a tick from June 2010 out and lower to unchanged at the front of the curve. Signs of rising home mortgage approvals were not necessarily a big driver today and accompanied by a weaker reading on consumer lending.

Australian rate futures. There was no change in Aussie bill prices today in an uneventful session. The March 2011 contract carries a yield of 5.56% and implies more interest rate tightening over and above the 4.5% yield for the March 2010 contract.

90-day bills of acceptance (BA's) have barely budged today. Investors see no change in the yield curve structure through March were rates currently stand at 0.48% while one year out from there the implied yield on the March 2011 contract is 1.87%.  

Andrew Wilkinson