Wednesday December 9, 2009

Global bonds have come to something of an impasse at the middle of the week. The earlier Fitch Ratings downgrade to the sovereign debt rating of Greece and Moody's Investor Services prod at the growing deficits of the U.S. and U.K. have passed. As they do so, they have pushed back against the wave of higher global yields swept in unceremoniously by the recent impressive recovery for American labor market conditions.

Equity markets are being forced to wind down perhaps prematurely as euphoria gives way to potential crashes of optimism. Bond markets are being forced to digest ongoing supply despite resurfacing deficit worries as a backdrop. And currency market movements are not only turning violent and unpredictable, but they are also causing commodity markets to respond in Pavlovian fashion. Needless to say, for a midweek day, markets are eerily quiet and lacking in direction.

Eurodollar futures are trading in positive territory by perhaps two-to-three ticks at the front end. The March 10-year note future has taken back pre-market losses on another day of hefty government bond issuance. Yields are higher than 24 hours earlier at 3.40%.

European short futures - The longer end of the yield curve is wrestling with the recent sell off for bond prices yet continues to feel a bid on account of the Greek debt rating decline and potential for Eurozone slowdown. Tuesday's super rally in the March bund proved unsustainable into the close and managed only a mid-range close. Wednesday, however, is a different story and bunds are pushing strongly on recent resistance at 123.75 and look sure to break the range. Yields at the 10-year have fallen to 3.14%.

British interest rate futures - are higher after the pre-budget speech from the Chancellor of the Exchequer. March gilts are 22 ticks higher yielding 3.66% after the market took the proposed measures in its stride. The Chancellor announced a rather steep 50% tax on City bonuses at banks between now and the end of April, which although undoubtedly unpopular at banks across the Square Mile may swing some voters the way of the Labor party in next May's election.

Australian rate futures rallied after a consumer confidence reading and mortgage lending data both softened, lessening the likelihood of another interest rate rise. The softer tone to yields seems appropriate with a domestic currency hovering beneath 90 U.S. cents as risk appetite takes a back seat. The contract expiring in September added five basis points to reflect an implied yield of 4.96%.

Canada's 90-day BA's are little changed and like Eurodollars are marking time. Despite an earlier loss for government bonds, running counter to other leading nations so far today, Canada's 10-year bond is back to unchanged and carries a yield of 3.31%.

Andrew Wilkinson                                                                    

Senior Market Analyst