Wednesday December 2, 2009

With the ghost of Dubai disappearing from the world's stage as fast as it appeared, investors continue to exit the safety of government bonds midweek. Yields on leading 10-year benchmark government bonds and notes continue to push towards the highest levels in a week as Dubai World says it's half way home in rescheduling repayments on around $59 billion of dubious debts. Luxembourg's Jean Claude Juncker spoke about the limited exposure of Eurozone banks to Dubai and as such confidently said that there is no reason to be worried.

March U.S. t-notes are off their earlier lows after the ADP private employers report showed 169,000 job losses throughout November. I'm unsure precisely why this is supportive of notes on the current view that the data is worse than the 150,000 estimate. The pace of declines is clearly slowing with the report the least pessimistic since July 2008 and the October report was also revised lower. Overall the 19,000 miss above the estimate is actually a miss of just 11,000 - a mere drop in the ocean if you consider the positive nature of today's report.

Japan - yields rose across the Japanese yield curve with the benchmark rising two basis points to yield 1.23%. The failure of the BoJ to step-up the amount of government or corporate bond purchases alongside the $115 billion cash promise it made to local borrowers on Tuesday caused a rethink. Bond investors had hoped that the Bank might further reduce the supply of bonds through its open market operations, but the additional liquidity measures made available Tuesday appear limited to three-month loans at this point.

Eurodollar futures are essentially flat after the ADP report as investors anticipate the official BLS reading on Friday. That report has the capability to make sparks fly in the event that it forces a rethink on Fed policy. Eurodollars have still benefitted from the recent flight to quality as have longer dated yields, which are now starting to reassess the need for safety as a direct result of discussions on Dubai's debt.

European short futures - continue to edge higher into Thursday's details on the ECB's plans for its maturing one-year loans to the European banking system. Most project a continued one-year fixed rate of 1% to renew loans. The ECB not ruling out anything as it mulls its alternatives according to Jean Claude Trichet, its President. And although the ECB will could make provision to vary the price of loans through final maturity, it might be more wary of prematurely signaling any intention to raise rates in 2010 leaving it cautious on anything other than a fixed term. March bunds are lower by nine ticks to yield 3.18% today and the 2s/10s has stretched out a little.

British interest rate futures are flat to lower following data showing a mild improvement in the fortunes of the construction sector. The PMI reading improved to 47 indicating a step closer towards standstill rather than contraction. The pound added to gains against the dollar while the yield on the 10-year gilt increased five basis points to 3.59%. The March gilt future dropped by 36 ticks to stand at 117.90. The PMI service sector survey due Thursday should continue to show expansion of this important sector.

Australian rate futures reversed the post-RBA meeting gains as risk appetite resurfaced in the region. Rising base metals and prices for gold jumped around 2%, with gold ringing up a fresh record high. At $1,218.40 an ounce, gold remains less than half ots inflation adjusted reading of $2,600 per ounce. The loss of faith in paper currencies continues and that's allowing the Australian dollar the room to perform better than others in gold terms. As gold rises in favor, so does the Aussie. Nearby 90-day bill prices slipped as much as 10 basis points at the December 2010 contract to imply a yield of 5.19%. Meanwhile the sloppy performance of Japanese bond prices helped influence a 12 basis point rise in Australian yields at the 10-year maturity to 5.31%.

10-year Canadian bond futures slipped in price by 13 ticks to yield 3.25% while 90-day bills of acceptance (BA's) mirrored a lackluster Eurodollar performance. The Canadian dollar strengthened as mineral prices rose, but ahead of labor market data also scheduled for release on Friday, the Canadian curve remains unwilling to shift.

Andrew Wilkinson                                                                    

Senior Market Analyst

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Andrew Wilkinson