The ongoing struggle between the government of Greece and its European friends is playing a hearty role in depressing bond yields around the world. The longer the discord continues, the longer it will maintain an emphasis on how much of a bind that leaves the European Central Bank, which no longer has a typical recovery to hang its interest rate decisions on. Meanwhile, the softer tone to yields was helped by words from the head of the Chicago Fed who appears to have bought another six months of low rates in the United States.


Eurodollar futures - Charles Evans, head of the Chicago Fed and a non-voting policymaker, speaking in Shanghai told an audience that if the Fed wants to maintain the momentum of current economic growth, it will probably need to maintain an accommodative monetary posture for at least six months. Mr. Evans added that it wouldn't surprise him if that meant policy was left unchanged until 2011.

Bond yields declined with the 10-year reaching 3.65% as the June future rallied to 117-14. Mr. Evans also sounded cautious about a recovery in the labor market where he noted that employers were not behaving like they did during the recovery from the 1990's recession. And so by predicting a growth rate of as much as 3.5% he's essentially confirming a jobless recovery in line with what many economists are worried about. Eurodollars added four or five ticks along the curve as implied yields declined. Those gains were reinforced by news on Tuesday of a drop in existing home sales to an annualized pace of 5.02 million. At that pace it's becoming clearer that the extension of tax credits to bring on more new and existing homeowners to enter the market is having less of an impact than lawmakers intended. Average home prices slipped year-over-year as did the value of the median-priced home. More worrying for the housing market is the increase in the supply of homes on the market, this means that at the pace of current activity it would take over nine months to clear the inventory backlog. The message is that the housing recession has been thwarted last year, not completely mended.

European short futures - Euribor futures are higher by three ticks while German bund yields have eased further to 3.05% with investors burying their heads in the sand as the prospects for any form of cohesion arising from this week's EU summit plunges. Well, cohesion will likely be limited to everyone agreeing that Greece must right its own path and pay the consequences of its folly before Europe spends a penny on Athens.

Australian rate futures - Aussie credit markets dipped as yields rose marginally at the shorter end where bill prices limped home with two-tick losses. Meanwhile 10-year government debt prices rose sending the curve lower by two basis points to yield 5.65%.


Canada's 90-day BA's - Getting over a recent burst of inflationary pressures, the Canadian curve felt the boost from a slip in U.S. yield expectations today. 90-day bill prices jumped as much as four basis points and government bond prices rose sending the yield down to 3.44%.

British interest rate futures - An unexpectedly positive surprise for the February inflation reading helped lift short sterling futures sending implied yields lower. One month ago, a negative report sent expectations rising that the Bank of England would likely rush into lifting interest rates in response to an accelerating cost of living. Gilt yields declined with caution to 3.91% on the eve of Wednesday's U.K. budget in which Chancellor Darling will address an uncomfortable deficit running at an equivalent 12.7% of GDP. It may well be the final budget under the Labour party ahead of a likely May election.

Gilt prices were firmer as investors mull prospects for a 16% decline in gilt issuance for the fiscal year starting April 1. In the year ending in March the British government will have raised £225 billion in debt with analysts expecting that volume to decline to £189 billion next year as the economy recovers. The British government has pushed its credit profile to the limit during the recession forcing the major agencies to warn over impending downgrades if the medium-term plan fails to dictate improvement in public finances.

Japan - Bond yields at the 10-year area of the curve declined to 1.35%.

Andrew Wilkinson

Senior Market Analyst