There is no major driving force behind interest rate markets today other than a slightly more positive tone towards risk. The S&P 500 index after a dull down session closed on a high and, despite overnight yen-related losses for Asian markets, looks set for a positive session today. If equity investors challenge the November peaks it would be reasonable to expect a commensurate dump for presently low yields implied by short interest rate futures. Stronger commodity related dollars are firmer also implying a reversal in risk appetite following the Australian jobs report and an extension of Chinese measures to spur consumption.

A surprise rise in U.S. weekly jobless claims to 474,000 still helped maintain a better longer term picture of the health of the economy. While measures of continuing and extended claims still remind us that all is not well for the economy, the encouraging factor is at the front end where the four-week moving average for initial claims came in at 473,750, which is the lowest since September 2008.

As a result Eurodollar futures are seeing some slippage today. June to December contracts expiring next year have seen yields rise between two and four basis points today with the latter priced at 98.79 implying a yield of 1.21% one year ahead. More bond issuance is again on the agenda today, this time with a slug of 30 years to be issued by the treasury. The yield at the benchmark 10-year area of the curve is higher again today carrying a yield of 3.45% with the March future on the CBOT down 11/32 at 118-10.

European short futures - With a rally in European stock markets including one for Greek financial issues, there is a less hurried need to seek the safety of German debt today. In a risk friendlier environment the March bund has shed 35 ticks to stand at 123.16 proving that resistance to lower yields in the prior two sessions remains intact. Shorter dated futures are nursing only minor losses of a tick to a tick-and-a-half after wholesale prices for Germany came in at a raunchy 0.7% for November reminding investors that even with modest recovery, prices might rise. As a result the year-over-year data came in at -3.2% and so less than half the October reading of -7%.

British interest rate futures - are unchanged but there's no hiding the delayed disenchantment to the prospects for yields following yesterday's PBR. The yield on the 10-year gilt due in March 2010 rose by a monstrous 13 basis points to 3.79% and so widening the spread over U.S. and core European issues. Today's rise in yields narrowed the premium of Spain's 10-year to just five basis points on a day when investors are already chattering about a possible downgrade for Spain in the wake of that of Greece. British short rate futures are starting to eek out minor gains on the realization that the Bank of England is furthest away from raising rates especially if rising long yields serve a blow to its asset purchase program. The Bank also left rates unchanged today as anticipated at 0.5%.

Australian rate futures - The prospect for a further interest rate rise from the Reserve Bank increased sharply after a government report revealed the addition of 31,200 jobs of which only 300 were part-time positions. Before today the market showed a 48% chance of a quarter point rate increase at the next RBA gathering on February 2. Following the report the chances rose to 60%. 10-year bonds hardly budge as investors believe that the report doesn't change the overall magnitude of likely policy response, but the drastic slide in the 90-day bill complex indicates a sense of added urgency may be required. The yield at 5.44% seems to offer relative value to investors who have repeatedly stepped up to buy bonds each time there is a big push. The result appears to be a series of lower peaks for yields on each occurrence. The curve continued to flatten as 90-day bills reversed an earlier in the week direction and gave up 20 basis points in price. The March contract slipped to yield 4.51% while the 18 basis point decline for June futures saw its yield rise to 4.86% for the weakest close in three weeks and so since the RBA last raised rates at the start of December.

Canada's 90-day BA's are lower in line with Eurodollars while the Canadian 10-year bond is lower by 38 ticks to 120.28 (March basis) offering a yield of 3.31%. Current yields for the December 2010 contracts see a projected rise in cash rates to 1.51% compared to the current yield of 0.49% at the contract expiring next week.

Andrew Wilkinson

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