Another week begins and already we see more verbal support from the lower-for-longer crowd. In an interview with the Financial Times, Chicago Fed president, Charles Bullard warned that U.S. interest rates might not turn up until the end of 2010 and perhaps not even until 2011. We thought we'd had our fill of such comments last week, but evidently the FT saved one in reserve to treat its readers. And while the day is starting off with a hefty pre-market gain for stock index futures (S&P 500 index +12 points) the same can't be said for financing costs.
The impact of a flood of money looking for a home at maturities likely to span the duration of the Fed's no-wake zone was to force yields at the front of the yield curve lower out as far as the two year maturity. Meanwhile further dated maturities didn't feel the same benefit.
It would appear that the market is now showing signs of feeding on a liquidity frenzy capable of driving equity prices to fresh 2009 highs into the year end. And although the same forces are driving yields lower at the front of the curve, the impact is not the same as you cast an eye further down the yield curve. The 10-year note is now yielding 3.39% and is moving incrementally higher as the days pass by. It would appear that the lower-for-longer crowd might be bumping up against the limit in terms of how far they can jawbone rates lower at present.
In terms of the 2s10s yield curve spread, the gradient of the curve continues to push higher with the two-year yield at 0.73% and the 10-year yield at 3.39% meaning the curve trades at around 266 basis points.
Eurodollar futures have stopped firming in price and declining in yield. The entire strip is in a very modest one-to-three basis point decline today notwithstanding the seemingly bullish Fed comments. June 2010 futures carry a 0.52% yield while September trades at 0.72%. After three sequential higher highs for the December 10-year note future, it's lower by 8/32 this morning and trading at its lowest price in a week. Existing home sales this morning are supposed to show a 2.3% month-over-month increase to a 5.7 million annual pace buoyed by government incentive to first-time home buyers.
European interest rate futures. German bunds are following t-notes as global yields look heavy this morning. The chart pattern for bunds looks less disaster-prone than for U.S. notes given where they have come from, but it wouldn't be a surprise to see a more significant long-end pullback should global equity prices build on commodity-inspired gains throughout the week. Perhaps it's not reasonable to expect a larger decline in this low inflation rate environment, but we should continue to watch out for such signs as economies do rebound. Euribor interest rate futures are lower in price (higher in yield terms) this morning following a more robust than anticipated reading from Markit Economics Purchasing Managers Survey, which showed a 53.7 composite reading covering both services and manufacturing sectors. Euro-short yields are heading higher again after ECB president Trichet's warnings served up cold on Friday stating that liquidity measures implemented for special reasons will be withdrawn starting with December's maturing one-year loan agreements. The June 2010 contract implies a yield of 1.17% and September has slipped 5 basis points to 1.49%.
British rate futures are also weaker in line with the rest of the world today. A firmer pound sterling is possibly gaining momentum on the view that Wednesday's GDP data will shed unwanted weakness following a more robust retail sales report last week. The June 2010 contract is lower in price by 4 basis points to yield 0.96% while the December 2010 contract carries a yield today of 1.88%.
Australian rate futures - A firmer Aussie dollar inspired by rising equity prices and a surge in metals prices helped put rate futures on the defensive today as they fell by around 5 basis points along the strip. With interest rates in Australia already at 3.5% the market continues to expect more to come by year end hot on the heels of growing confidence in the rebound today. The December 2009 contract shows a yield of 4.09%, while the March 2010 contract shows a yield of 4.53%. We'll hear from the RBA's deputy governor overnight and get a handle on job vacancies too.
90-day bills of acceptance (BA's) have proved to be one of the lightest respondents recently. The Canadian economy is inherently hitched to the fortunes of the United States and hosts a similarly low monetary policy. Meanwhile its currency reacts more in line with the Aussie dollar given the plentiful status of raw minerals and crude oil across the nation. The Bank of Canada has pretty much stated that monetary policy is on vacation through the second quarter of 2010, while the Canadian currency continues to respond strongly whenever commodity prices pick up. Today the March/June 2010 spread has widened out to 19 basis points as investors unwind just some of last week's bullish interest rate expectations.