Yields Steady as Investors Slowly Return

Yields are going nowhere fast on Tuesday with most fixed income prices fluctuating between minor gains and losses. Several regional markets are playing catch-up as domestic investors respond to yield curve shifts while their own markets were closed. Curiously yields are not rising in response to the gains made by equity markets as investors don rose-tinted spectacles at the start of the year. That’s hardly surprising given the magnitude of the rise in yields during the last two months of 2010.

Eurodollar futures – Eurodollar futures have firmed in price sending implied yields lower by up to eight basis points along the strip. The March 10-year note future stopped falling at 120-00 this morning before rebounding to a session peak at 120-13 where it yields 3.33%. Later during the session we’ll learn the latest reading for factory output, which dealers expect will show a lesser pace of contraction for November.

European bond markets – Euribor futures fell sending implied yields higher by four basis points after an ECB liquidity drain now that banks can breathe a sigh of relief after the liquidity hurdle of New Year has passed. March German bund prices fell earlier in the day in response to acceleration in the pace of Eurozone CPI to the fastest in two years at 2.2%. Bunds later recovered given the concentration of rising energy prices within the data. The contract is now in positive territory at 125.84 having earlier reached 125.49 and carries a yield of 2.91%. Spanish and Italian yields eased by a couple of basis points while those in Ireland lagged. Portuguese and Greek yields rose.

British gilts – Short sterling futures caught up with weakness in North American markets over the New Year break. Implied yields rose by up to eight basis points as a result. British credit markets closed early last week and on a bullish streak that was subsequently reversed, locking British yields over the weekend. But there was other stronger data out today that also drove up yields. A larger than expected number of mortgage approvals and a surge in the December index of manufacturing output provided investors with further reason to force yields higher. The March gilt future shed 56 ticks to trade at 118.92 and yields 3.46%.

Japanese bonds – March JGB futures slumped 35 ticks as pressure on the exchange rate eased in light of a rebound for the U.S. dollar. Japanese stocks also rose to welcome in the New Year in a further indication that investors expect less rather than more stimulus from the central bank in the forthcoming year. Bond sellers today drove yields higher to 1.15%.

Australian bills – Aussie government bond yields rose by nine basis points to 5.56% following an extended weekend of New Year celebrations. However, with signs of a calming in Chinese manufacturing activity over the weekend 90-day bill prices actually rose by one basis point forcing the yield curve to steepen out. Australian manufacturers also continued to see lighter activity during December according to an AiG performance of manufacturers’ index.

Canadian bills – Bill prices didn’t respond much after a multi-session break with implied yields rising by one pip on a data-free day. On Friday the employment report is predicted to show a third straight monthly jobs gain as economic momentum gathers pace. Government bond futures expiring in March shed 30 pips to trade at 122.26 to carry a yield of 3.12%.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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