Wednesday, February 24, 2010

Investors are keen to hear what Ben Bernanke has to say about the Fed's exit strategy in Wednesday's semi-annual monetary policy testimony to Congress. His speech will hit the wires at 10am ET and for the record, Eurodollars are one tick up ahead of the news while March treasury note futures are offered at unchanged on the day. A meltdown in equity prices yesterday inspired by a slide in consumer confidence saw note yields decline sharply from 3.79% to 3.68%. Ever since last week's after-hours movement to lift the emergency discount rate the Fed has dispatched a series of speakers to downplay the measure and to soothe expectations over any change in official monetary policy.

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Eurodollar futures - Traders pricing March notes at unchanged are eagerly waiting to hear how Mr. Bernanke sees the prospects for the economy and whether he will further define the extended period phrase. Yesterday St. Louis Fed chief James Bullard said he'd be happy to maintain the phrase in FOMC communications so long as he could interpret it to mean that rates were on hold for at least six months. San Francisco speaker Yellen also reminded Fed-watchers recently that inflation was uncomfortably low and deserving of easy money.

Mr. Bernanke is expected to further address the Fed's exit strategy. To be honest, the more the Fed puts into a public forum, the better. We want to know what the Fed is thinking about from the perspective of transparency. Currently investors are tussling with the perspective of an exit strategy and a tepid economy. That's leading to confusion and someone needs to set the record straight that an exit strategy is something done way ahead of time. Perhaps we'll hear more this morning.

European short futures - March German bund prices are following through on Tuesday's downbeat IFO business confidence survey and are higher by 25 ticks at 123.92. Prices today reached the highest in 12 sessions as government yields slipped to 3.15%. Euribor futures are firmer by two-and-a-half ticks along the curve.

British interest rate futures - Gilts are the biggest mover today with the March contract up by 70 ticks to 115.16 where the yield has fallen by eight basis points to 4.09%. Investors continue to react to the weak economic prospects meaning more quantitative easing may be on the cards and by definition, more Bank of England intervention to push bond yields down. Sterling futures are higher and more so at the far end of the curve.

Australian rate futures -Weakness in Asian equity prices overnight helped suppress yields on Australian bond and short interest rate futures. The March 10-year bond rose to drive yields down by four basis points at 5.53%. A minor down tick for fourth quarter wage growth likely helped sentiment while money markets are still positioned for a 25 basis point rise when the RBA meets March 2.

Canada's 90-day BA's - Canadian markets remain quiet ahead of Bernanke's testimony with no fresh influences to detract bill yields from tracking those on Eurodollar futures. The 10-year yield is down one basis point to 3.42%.

Japan - A 1.5% decline in the Nikkei in response to U.S. weakness helped spark a rally in JGBs where the March contract rose to 139.66 for a 25 tick rally. The 10-year yield edged down to 1.30%.

Andrew Wilkinson

Senior Market Analyst