IB Interest Rate Brief - Easing Eurozone tensions push bond yields higher

Former Italian Prime Minister and no stranger to yawning fiscal deficits, Romano Prodi said earlier today that the Greek crisis is over. Having weathered the storm and with less time pressing their own fiscal agenda, the former President of the European Commission said that other lesser indebted Eurozone nations will be spared the Greek-style drama. Signor Prodi sees no reason for other Eurozone members to falter from this point.

European short futures - While it took the euro some time to find its legs in the wake of his comments, credit default swap prices took a nosedive and peripheral debt spreads against core German bunds narrowed.

Although June German bund prices reached an intraday low at 122.68 shortly after U.S. equity markets officially opened, peripheral nations' bond prices are seeing limited losses. The premium investors paid to hold Greek 10-year debt narrowed relative to bunds, declining by 11 basis points to 280 basis points. During the crisis the spread blew out to 280 basis points. Portuguese debt, subject to resurfacing downgrade speculation this week narrowed to 114 basis points while Italian and Spanish debt also saw premiums narrow to 94 and 91 basis points respectively.

German debt prices rose earlier in the day after weaker trade data at the turn of the year from the largest member of the Eurozone. A contraction of 6.3% in exports eroded the deficit to €8 billion. Euribor futures are a shade lower on the day despite the ongoing provision of abundant short-term liquidity.

Eurodollar futures -Soothing words yesterday from a New York Fed markets official spurred gains in Eurodollar futures. But the gains are giving way marginally today despite further encouraging words from Chicago Fed President Charles Evans. He stated that rates would be kept low in his opinion for at least three or four more meetings. Perhaps his words are less soothing in so far as they put monetary tightening back on the 2010 agenda. The curve is steepening a little this morning with 10-year yields higher by 3 pips at 3.73% and the two-year yield up two pips at 0.89%.

Canada's 90-day BA's - June government bond futures slipped 17 ticks to 117.85 sending yields higher by three pips to 3.53%. Bill futures price dropped harder than Eurodollars sending yields higher by four basis points across the curve.

British interest rate futures - Further evidence of uncertainty in the U.K. arrived in the shape of the first decline in five months for manufacturing output. That drop in the data was unexpected but confirmed weakness in demand across the continental economy. Short sterling futures rallied by about four ticks on the news while the June gilt contract slipped by 14 ticks to 114.32.

Australian rate futures - A surge in Chinese export data for February confirmed strong Pacific and Asian activity just as the Reserve Bank's assistant Governor was priming the nation for above average growth for the next several years. Ahead of tomorrow's employment report expected to show employers added 15,000 new jobs, money traders sold bill futures propelling yields higher by as much as 10 basis points. Two year bonds added five basis points to stand at 4.76% while 10-year notes maintained a yield of 5.53%.

Japan - JGB futures rose on the weakness in capital spending delivered in a 3.7% decline in machinery orders data. June JGP futures added 12 ticks to 139.42 where the yield slipped to 1.29%.

Andrew Wilkinson

Senior Market Analyst