March treasury note futures have fallen to the lowest price since October 27 this morning after investors discounted a report showing third-quarter weakness for growth and instead chose to focus on the stronger reading within it for personal spending. A later report proved that government measures aimed at shoring up the housing market were just the ticket and helped underpin the prevailing trend towards higher yields. The 10-year yield approached 3.75% by Tuesday noon with a party in the stock market helping further spoil the bond market tone. Investors continue to discount a recovery and with it they are growing increasingly concerned that inflation might be an accompanying factor. Even if inflation isn’t in tow, the need to retain an easy money bias loses its appeal, which explains investors’ loss of resilience to yet-higher equity prices as a recovery is price in.
Eurodollar futures – erased earlier front-month losses while the steeper nature of the yield curve inevitably means price weakness for contracts expiring beyond one year forward. The September 2010 contract is unchanged and reflects a yield of 0.93%. March notes are 12 ticks lower at 116-09 as the appeal of fixed income wanes in light of appetite for riskier assets.
European short futures – are lower by two ticks across the horizon. Bunds are suffering the same fate as evident in North America. ECB member, Juergen Stark noted that the Eurozone reached a point of maximum contraction during the final quarter of the year and therefore predicts a brighter first quarter. Of course this much we already know but the pent up demand for the safety of fixed income took a step down this morning after investors reveled in the relief of a downgrade for Greek debt from the third ratings agency. Moody’s Investor Services shaved a notch off the sovereign debt rating of Greece and investors rushed to buy stocks as a result. The fact that bonds issued by Greece remain legal collateral at the ECB seems to be the biggest factor at play. March bunds took a swan dive and fell 70 ticks to 122.34 to yield 3.27%. Yields at the 10-year rose eight basis points on the day.
British interest rate futures – British 10-year government yields rose five basis points to 3.91% despite a worse than expected reading for third quarter GDP. The report doubled the pace of contraction but only as far as 0.2%. A prediction from the RICS points to a moribund year for British home values in the face of a likely withdrawal of economic stimulus. Short sterling futures continue to look vulnerable and fell as much as seven basis points at the December 2010 expiration, where the implied yield rose to 1.89%.
Australian rate futures –Aussie rates backed up further in line with other G7 debt with the benchmark 10-year jumping 10 basis points to yield 5.48%. The strong hints last week that the RBA might be on an indefinite sabbatical helped drive down yields on Australian government debt. This week the story couldn’t be more different as global yields get caught up in the carnage of economic recovery.
Canada’s 90-day BA’s - As noted in our daily forex comments, the Canadian dollar is caught in the spotlight of a potential yield shift. The interest rate market is starting to doubt the words of Bank of Canada governor, Mark Carney who has promised to leave rates on hold through June next year unless inflation interferes. The 90-day bill future expiring in June 2010 traded up to 99.43 at the start of December but has fallen towards 99.25 to imply a 0.75% yield by the middle of the year. The March contract has suffered less and has eased from 99.54 to 99.49 meaning that the March/June calendar spread is braced for change from the BoC anytime soon. The central bank doesn’t meet again until January 19 but there isn’t a cat’s chance in hell it will move yet. But markets might.
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