Thursday, March 18, 2010

With investors increasingly convinced that short term interest rates may be on hold for longer, fixed income markets are finding less room to rally. U.S. yields are higher on the day unable to sustain a lower open in light of the Fed's accommodative stance and further survey data indicating economic improvement. European yields are reversing earlier gains made on account of enhanced uncertainty caused by official German comments directing the Greek government go to the IMF in the event they feel the need to borrow money.


Eurodollar futures - Another small decline in weekly jobless claims data to 457,000 spells ongoing subtle labor market improvement, and although inflation data remained tame in today's report, a Philadelphia Fed survey indicated further economic expansion. This vote of confidence helped buck the recent trend lower for yields with June treasury note futures losing eight ticks by 11:30am ET to yield 3.66%. Eurodollars are melting lower somewhat with losses of around four ticks on nearby expirations. Fixed income investors are struggling to reconcile the Fed's Tuesday statement with ongoing improvements in confidence and economic activity.

European short futures - Euribor futures are higher by the minimum allowed by the exchange. The drama playing out surrounding a lack of support for the Greeks is keeping the June German bund future buoyed, but not by much. The contract rose to an intraday high at 123.39 but later eased to 123.22. Yields are static at 4.10%.

Australian rate futures - Aussie bills took a positive lead from a press report from China indicating that the central bank may be acting to restrict lending. Slower Chinese growth might be bad for Australia. However, the news is specific to property developers who might be hoarding land and holding apartments off the market. Banks have allegedly been banned from lending to these scoundrels hoping to profit from rising prices. Bill futures in Sydney rallied by three basis points providing some reprieve to recent selling pressure.


Canada's 90-day BA's - Government bonds are making gains today with the yield on the 10-year easing to 3.46%. Bill prices unusually failed to mirror losses for Eurodollars and are higher by anywhere between two and six basis points along the curve. In my earlier IB Daily FX Brief I mentioned that the government appears less resistant to gains in the local dollar citing productivity gains as an equaling factor. Typically an overall monetary stance is made up of the level of interest rates and the value of the exchange rate. I can't help wondering this morning whether the approach to parity with the dollar isn't helping calm rate expectations. On the other hand, a sanguine U.S. CPI report may be sending a bullish signal ahead of comparative Canadian data on Friday.

British interest rate futures - Short sterling futures are a tick higher after a positive surprise from the latest reading of government finances. The £12.4 billion shortfall in government revenues throughout February was a billion or so lighter than expected. Hopes that the government will need to borrow less helped fuel gilt prices where yields dropped five basis points to 3.95%. The June gilt future was the biggest mover of the day jumping 44 ticks to 115.19.

Japan - Bond yields at the 10-year area of the curve rose again to 1.36% and close to the top end of the recent range. June JGB futures slipped 23 ticks to 138.61 after a report showed ongoing optimism among large corporations. The major Tankan survey will be released April 1 as the new fiscal year begins and dealers are growing increasingly confident in global recovery prospects. And while that would detract from the appeal of fixed income, it doesn't mean the Bank of Japan is any closer to tightening monetary policy. But dealers appear to be getting increasingly skeptical about the sustainability of the recent jump in bond prices.

Andrew Wilkinson