The lowest price traded in the March 10-year U.S. treasury note in the aftermath of the Fed’s decision to lift the discount rate by one quarter of a point to 0.75% came within an hour of that decision. In European trading, sellers failed to push prices lower and notes have subsequently rallied pretty much back to where they were ahead of the breaking news on Thursday. Of course fixed income prices were helped by the timing and subsequently bullish statements from Fed members Bullard and Lockhart along with today’s news of the first monthly decline in core CPI since 1982. That news helps confirm the Fed’s tone that the discount rate movement was purely technical and that monetary policy remains unchanged and that it is likely to remain so for several months if not longer.
The global interest rate picture changed overnight. However, the picture is a far cry from those days when the fed caught investors off guard with unexpected shifts in the key fed funds rate by which it would deliberately start to change loan rates to businesses and households. And while it’s all too easy to say that when the Fed sneezes, Europe catches a cold, it is curious to contrast the reaction in the euro and euribor futures prices today.
Global short ends are lower in price with implied yields rising. In reality, if what the Fed says is true, today’s selling is unwarranted around the world. However, in the same way that it’s very hard to sleep with the television on at night, it’s very difficult for dealers to trade against the direction of the world’s most powerful central bank. And while its official policy statements might continue to reflect a neutral bias, everyone in the money market is now on watch for signs of life in the sleepy economic body.
Global long ends suffered also, but the brunt of the selling was evident in European bonds. While the dollar rose upon the expectation of improving yield differentials in its favor, that fantasy was not lived out in the shorter end making me wonder exactly how long the dollar mojo will last.
Eurodollar futures have settled on deeper wounds at further maturities. The trade seems to be moderate and the immediate knee-jerk reaction of losses ranging from three basis points in September to 99.35 (0.65%) and six basis points in the March 2011 contract to 98.61 (1.39%) portrays a calm reaction. The Eurodollar futures curve steepened up only minimally by six basis points between June10 and June11 for example. Meanwhile the 2s-10s curve spread actually narrowed from 290 basis points to 287 points during the last 24 hours. March t-note futures yield 3.79% with futures flat at 117-06,
European short futures – The bigger reactions today are apparent in the Eurozone markets. There is fresh breaking news crossing the wires carrying any update on the Greek situation although liquidity in the money markets is apparently marginally tighter. This is completely the opposite position of where the ECB would like to be as it considers also leaving an extraordinary liquidity stance behind. March Bund futures are off by a further 24 ticks at 122.76 and piercing that three-week old support mentioned yesterday. But euribor futures are off by almost as much as its Eurodollar counterpart, indicating that players feel the ECB will somehow be able to cast off its fire warden’s jacket and resume its role of inflation-wary professor in a rush to leave its emergency lending powers behind. Bund yields moved out to 3.27% narrowing the differential with dollars to 52 basis points from 55 points.
Several weeks ago I made reference to the December 2010 spread differential between these two contracts. At that time and as remains the case, Eurodollars carry a lower implied yield than three-month euribor futures. The basic point at the time was that the Fed might act sooner and harder than the ECB, which would cause the spread to at least narrow if not cross. Today that yield gap narrowed by half a basis point if at all indicating a lack of conviction that investors expect Fed aggression.
British interest rate futures – Gilt prices again slid sharply on fears that the Bank of England is getting left behind. Weakness in January retail sales data reported today again illustrates that the economy remains moribund. A general rise in bond yields around the world would raise the cost of borrowing for the British government at a time when the fiscal deficit is already worsening. Having touted the desire to create a distance between core and emergency policies late in 2009, the Bank is far from being in a position to abandon an emergency stance. Short sterling futures slipped less than European and American short rate futures to reflect this dilemma with front months only losing two to three basis points.
Australian rate futures – Aussie bond yields were hardly spared the selling momentum earlier with 10-year government bonds up two basis points to yield 5.55%. Adding some weight to the move was a testimony by the Governor of the Reserve Bank who told parliament that current short term interest rates were below average perhaps by as much as 50 to 100 basis points. Bill prices eased between two and six basis points with the December contract now predicting a yield of 5.1% by the end of the year
Canada’s 90-day BAs – Canadian bond prices added three basis points in yield to 3.51% narrowing the spread beneath U.S. notes to 29 basis points. Bill futures prices fell a little less than Eurodollar prices. The June – September spread moved out to 36 basis points. Don’t forget that the Bank of Canada has promised to hold off tightening before mid-year, which explains why this spread is far wider than the March – June spread at 15 basis points.
Japan – Japanese yields were equally unseated by the Fed’s surprise move today. The March 10-year JGB future dropped 16 ticks to yield 1.32%. Earlier this week the Bank of Japan left its position unchanged at a regular monthly meeting despite calls from the Finance Minister to do more to help fight deflationary forces. The Bank of Japan is probably furthest in moving away from emergency measures and rates are likely to remain low for a long time.