The interest rate outlook by Andrew Wilkinson at IB:
Rising consumer confidence and a surprise increase in the price of homes bolstered the view that the U.S. economic recovery remains intact, while sending bond prices lower at the same time. Rising yields is becoming an accepted sideshow of the recovery circus, except in the Eurozone where investors still exit the tent containing the freak show with a rather worried expression over the Greek Minotaur lurking within. The disparate views surrounding European versus U.S. recovery is for now maintaining the momentum behind a widening yield differential.
Eurodollar futures – June treasury note futures are four ticks lower at 115-26 following a surprise 0.3% monthly rise in home prices across 20 metropolitan areas. House prices were expected to decline by a similar amount. Tempering optimism that the recovery might accelerate is an expected rise in the number of foreclosed homes hitting the market during 2010. Some 4.5 million homeowners are expected to have to put a residence up for sale. Meanwhile government measures are being put into place to aid people who have lost employment or are behind on their mortgage payments. The 10-year yield rose two basis points to 3.89%.
A weaker bias to Eurodollar short interest rate futures was aided by a Conference Board consumer confidence report that not only saw an upward revision to the February reading but also came in stronger than was forecast for March. The headline number showed a gain of 52.5 against an expected 51.0. In addition index values within the survey showed that consumers are growing increasingly confident about the future, while the present conditions index rose to a 10-month peak. Consumers also saw resultant improvement in the labor market saying that they thought jobs were plentiful while those believing jobs were scarce declined.
The data helped spur additional gains for equity prices leaving a further strain on the U.S. yield curve but by 11am ET that rally had petered out.
European short futures – Last week’s agreement among EU leaders that Greece can rely on a joint IMF/ EU aid package as a last line of defense, investors were happy to buy new issues yesterday from the government of Greece. However, they have been seen happier at an earlier auction and they were probably less happy facing a sharp price fall just one day after the event. Greece continues to feel its way carefully through a minefield of debt issuance. During March investors bid for three-times the available 10 year bonds issued. The bid-to-cover ratio at Monday’s auction of seven-year debt was just 1.2 times. However, the planned sale of 12-year notes was shoddy with the government managing to sell only €390 million of a tranche of €1 billion.
As a result German bond prices slipped sending yield spreads wider against core government bonds. The premium commanded by investors at the 10-year area of the curve widened by 14 basis points to 330 basis points in favor of Germany today. Euribor futures were mixed with a minor loss at the front of the curve as longer maturities made marginal gains. The June bund future rose 19 ticks to 123.16 with the 10-year yield easing one basis point to 3.11%.
British interest rate futures – June gilt prices didn’t feel the same benefit from rising Greek yields after an upward revision to British fourth quarter growth. The final reading showed a 0.4% quarterly pace of growth, which helped underscore recovery hopes ahead of the election. The June gilt fell by 37 ticks as a result sending the 10-year government yield higher to 3.98%. Short futures slipped by a tick as yields rose marginally.
Australian rate futures – Futures expiring beyond September have become susceptible to further losses as it becomes more apparent that the RBA wants to get back to a normal and therefore less accommodative monetary stance. Bill futures fell a further six basis points during Tuesday and appear ready to slip over the edge sending yields to the highest levels since early January. Recent official comments have caused investors to rethink the peak and timing of the rate cycle.
Canada’s 90-day BA’s – Industrial production prices for February were flat during February according to statistics released today, while prices rose at an increased pace in January. The data doesn’t help the domestic inflation backdrop and the Bank of Canada will likely need to address a higher inflation projection during April when it releases latest forecasts. Bill prices declined to send shorter yields higher by three basis points while the June CGB future eased by 16 ticks to 117.35 where the yield was two basis points higher at 3.58%.
Japan – Japanese yields failed to respond positively by a meaningful amount following the weakness in industrial production for February. A 0.9% decline in the February measure was almost twice the expected decline and marked the first drop in 11 months. While the 10-year yield eased a half basis point the outright 1.39% yield is still pushing on the highest level since November. Possibly behind today’s dull response to weak data on behalf of bond investors is that on Thursday the Bank of Japan releases its quarterly survey of large corporations, known as the Tankan. We will get a first flash sense of whether a recent doubling of stimulus by the Bank has lifted sentiment in the meantime.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.