Bonds at a standstill

Thursday January 21, 2010

Global fixed income markets appear to be stuck in a revolving door at present with investors spinning on the spot in a narrowly defined yield range fearing that a push too hard from either direction might set off an exaggerated movement. The force on one side that would send yields higher stems from surging Chinese growth. Yet investors can't rejoice in that data because the domestic authorities are taking steps to calm the fire boosting the economy. On the other hand, data remains weak, yet not too weak to set off fears of a secondary dip in growth that might cause bond yields to plummet.

Weakness in the single European currency unit continues as the debate over just how watertight or otherwise the plans of the government of Greece will prove. Despite the slide in the value of the euro again today, investors have stepped back into bonds of peripheral European nations' sovereign debt seeking value after bond prices fell relative to core German paper prices.

German Bundesbank president Axel Weber addressed an audience today saying that the ECB was progressing with the normalization of its monetary framework for controlling money market liquidity. He also referred to the possibility that German growth during the first quarter may yet flatten after a fourth quarter rebound. On inflation Mr. Weber forecast a CPI reading of 1.5% for the year end, while stating that the risks were balanced and upside potential could come from higher indirect taxation and government spending.

Eurodollar futures - Treasury prices are lacking in direction but ahead of two forward looking reports due mid-morning are lower by three ticks at the March 10-year future, which is trading at 117-10. The yield at 3.66% is up by just one basis point today. Eurodollar futures are flat to a shade lower in price terms despite a jump in last week's initial claims data, which came in at 482,000. However, the Labor Department said that this was caused by an administration back log at year end and was unrelated to economics. Continuing claims stood still at 4.6 million.   

British interest rate futures - A well supported 10-year auction of gilts helped sentiment today where 2.38 bids were received per available bond. Driving yields lower also was data showing weakness in the pattern of lending. The M4 broad monetary aggregate slipped 1.1% in December indicating a lack of appetite for debt. March gilts are 29 ticks higher at 114.90 while short sterling added eight ticks as investors continue to deny that this week's inflation measure holds much water.

European short futures - March bunds lost ground today despite weakness in a PMI survey indicating a slower pace of expansion. Mr. Weber's comments did little to inspire direction one way or the other while the preference for Spanish and other peripheral government bonds today is largely the cause for selling in bunds. The March contract gave up 20 ticks to 122.85 where the 10-year yields 3.25%.

Australian rate futures -The yield on Aussie bonds reflects that revolving door mentality perfectly in the face of the strong Chinese GDP report overnight. Bonds are unchanged yielding 5.51%. Bill futures declined by one tick.

Canada's 90-day BA's - A string reading for Canadian wholesale sales is a throwback to November and doesn't impact the current view. The Canadian dollar has felt the tailwinds of official Chinese monetary games as investors shun commodity currencies. There has thus far been little impact on Canadian rates, where the 10-year government bond future is up 11 ticks to yield 3.41% today following an earlier in the week report showing a lack of price pressures.

Japan - Japanese bond futures expiring in March reacted negatively to a glowing GDP report from China confirming that its economy grew by 8.7% through the year. Fourth quarter growth rose to 10.7%. The report dampened demand for JGBs and caused the yield to rise one basis point to 1.33%.

Andrew Wilkinson                                                                    

Senior Market Analyst