IB Interest Rate Monitor

Monday December 7, 2009

Global interest rate futures are making price gains today even if only modestly as investors fail to follow through on the conviction they showed to finish the week on account of the changing temperature of the American labor market. Yields are marginally lower, while the bond markets are also making modest headway. No doubt the watch word today is value as investors try to wrap their heads around the meaning of an improving economy. Fed chief Bernanke will address an audience at the Economic Club in Washington later and investors will be keen to learn how the Fed received the news of a mere 11,000 job losses for November. Moreover, will the revisions to earlier data help knock the Fed into action from its extended slumber party to a party of action?

As I noted in the earlier forex commentary, markets are dealing today with a tentative argument over increased risk aversion following Asian and European equity market weakness. This does feel like a phony excuse behind a relief rally in the dollar. I'm not sure why the bid extends to the bond markets (and STIR futures for that matter) especially without a catalyst bigger than a rehash of the Dubai story. It would seem more fitting to expect ongoing liquidation from global short-end interest rate futures as economic data confirms recovery.

Eurodollar futures hit rock bottom in the immediate aftermath of the news that only 11,000 jobs were shed by employers in November. The June contract reached 0.7% in yield terms and as the dollar gets a risk-aversion bid today expectations continued to take a trimming. With the short end of the strip higher by four pips, June 2010 reached 0.64% this morning. The curve retains its steeper tone after longer yields jumped on Friday. The March10/March11 calendar spread is currently trading at 127 basis points. The yield at the 10-year area of the curve has come in to 3.44% after almost hitting 3.5% on Friday.

European short futures - Euribor contracts are up just a tick. There was little response to comments made by ECB member Guy Quaden of the Belgian Central Bank who tried to quash the notion that a rate tightening cycle was in the offing. For want of any other inspiration the curve is breathing a little easier with March German bunds rallying back 23 ticks to 122.27.  

British interest rate futures - Early weakness for short sterling saw a seven basis point price drop at the opening bell, which was quickly contained. The fear bid in the market - rightly or wrongly - saw futures edge higher. The June contract is up two ticks to yield 1.03%. Investors anticipate no changes when the Bank of England makes its monthly announcement on Thursday lunchtime. There will unlikely be any changes to the pace of bond purchases and short-term rates will most likely remain at 0.5%. Gilts are joining the global bond snapback and the March contract is higher by 9 ticks to 116.92.

Australian rate futures were are the exception that proves the rule today. The Australian dollar attempted an early rally in Asian market trading as investors reacted to a strong rise in the pace of job hiring. An index of newspaper and Internet job advertisements jumped at a healthy 5.2% pace in November. Australia seems to be the only market where investors are taking seriously the prospect for further monetary tightening on account of labor market trends.

Canada's 90-day BA's are tentatively higher today. It seems that the big shake out seen Friday has run its course for now. Government bonds are higher matching U.S. markets. Bills are a couple of ticks higher following Eurodollars. The December 2010 contract has been lifted six ticks off its Friday low to carry an implied yield of 1.56%.

Andrew Wilkinson                                                                    

Senior Market Analyst