Wednesday FX Interest Rate Monitor

 |  Includes: FXA, FXC, GBB
by: Interactive Brokers

The slamming that bond yields have taken in recent days took something of a respite at least as far as North America was concerned following the release of slightly tepid readings for American consumption and Canadian growth. Investors pushed back only slightly following several days of heavy selling pressure for note and bond prices in the face of expectations that firming data will cause central banks to reverse policy at some point. A disappointing decline in new home sales just out of Washington has again spurred some life back into bond prices with a seven tick gain for March notes.

However, European bond prices continued to give up ground. The British fixed income market had reason to rally in light of a cautious tone form the minutes of the December policy meeting at the Bank of England. However, thin market conditions remain in place and the dominant trade was to the downside and yields continued to trend higher. Rising consumer confidence among Italians bodes well for economic activity in 2010 and once again the easy trade was to get short of German bunds – the Eurozone’s benchmark.

Eurodollar futures – weaker than anticipated personal income and spending data for November caused bond sellers reason enough to stop selling today. Revisions to both datasets saw stronger income but lower spending for the October reading and overall the data is largely a wash. The numbers are hardly a huge driver of activity at the best of times and money traders have little reason to take on fresh positions in light of today’s numbers. Consumer confidence data is scheduled for later this morning in the form of a University of Michigan survey.

Eurodollars are up to unchanged on the session while March notes are seven ticks firmer at 116-14. Yields at the 10-year maturity slipped three basis points to 3.70% after reaching an intraday high Tuesday at 3.76%. In light of fresh annual highs for equity market indices today the question is how long it will take traders to discount further rises in yield. The June 2009 high-water mark for yields stands at 4% and while the sell off at the time proved premature, it can only be a matter of time before traders insist on a concession for taking on the huge government issuance as the deficit funding continues.

European short futures – Euribor futures are now firmer by a tick and volumes are underwhelming as the holiday festivities keep investors at bay. Confidence among Italian consumers from the Eurozone’s fourth largest economy rose to a seven-year peak in December heralding improvements for 2010. The yield curve nevertheless steepened following in the footsteps of increasing yields on U.S. fixed income later in Tuesday’s session. March bund prices are lower by 33 ticks to 122.03 as yields at the 10-year maturity rise by two basis points to 3.28%.

British interest rate futures – It’s hard to take away a decidedly positive tone from the December MPC minutes released today. The silver lining following the fact that third quarter growth showed contraction is that the MPC feels the economy will display greater momentum looking ahead. The committee is despondent with the money supply data, which is how they gauge the impact of the £300 billion quantitative easing package. March gilt is lower by 49 ticks to stand at 114.76 carrying a yield of 3.96% and higher by five basis points on the day.

Australian rate futures –Aussie bonds continued to lose ground sending yields five basis points higher to 5.53%. There was little of note in today’s action impacting short dated futures.

Canada’s 90-day BA’s - Bills edged up one tick and the price of government bond futures rallied 38 ticks to push yields down to 3.59% after a slightly disappointing reading for GDP for the month of October. A decline in mining output was the culprit weighing on a 0.2% monthly gain while real estate services and the impact of cold weather helped boost output at utilities. Economists predict that October data will help boost the fourth quarter reading for output by at a 3.3% pace.