have driven yields higher at the end of the week had it not been for
an earlier warning from Moody's. The credit ratings agency warned that
the clock was ticking for the U.S. to cut its budget deficit, which
has surged relative to output over just three years. As the economy
expands and as investors sense the Fed will ultimately step away from
its period of excessively loose policy, the two-to-30-year curve
reached a record 404 basis point gradient on Friday.
*Eurodollar futures -* Fourth quarter GDP might have been higher and
indeed fell short missing by just three-tenths of a percentage point
expectations for growth of 3.5%. However, excluding the drag brought
about by inventories the economy grew at 7.1% and its fastest since
1984. March treasury note futures slid in reaction to the report
hitting 120-06 before dealers locked in to the intraday rise in
yields. Eurodollar futures also pared losses as dealers conclude that
the Fed will remain on hold for the indefinite future. One reason
perhaps was a slip within the GDP report for prices, which only rose
by 0.3% after a third quarter gain of 2.1%. Elsewhere Moody's said
that the U.S. might need to be taught a lesson for failing to take the
lead in cutting its budget deficit. The agency said it might take the
inevitable step of putting the nation's debt on watch for possible
downgrade citing concerns that lawmakers are lacking the will to
tackle the bloated deficit. In 2007 the deficit represented 1% of the
overall size of the economy yet today that number stands at 8.8%
following rescue efforts to prevent the failure of the financial
sector. Moody's noted that not helping alleviate its concerns over a
worsening of the fiscal environment was the recent extension to tax
cuts and the plausibility that lawmakers might not commit to cut
spending. Treasury Secretary Geithner responded in Davos, Switzerland
by saying that fiscal policy must also support the near-term
challenges facing the economy.
*Canadian bills -* Short-dated bills dipped in response to the
improved health of the U.S. economy following remarks by Bank of
Canada Governor at Davos. He welcomed signs of improvement given the
close-linkage between the two nations but warned of the perils of a
strengthening local currency. Government bond prices have clawed back
to almost unchanged on the session at 121.20 following earlier
weakness to 120.75. The 10-year yield trades at 3.30% to close the
week.
*British gilts* - Inflation worries continue to dominate European
credit markets and have taken over as the number one force behind
implied yield movements as sovereign debt crisis woes appear to
subside. Short sterling prices fell despite the biggest monthly
decline in two decades for a consumer confidence report. Investors
would currently rather trade shorter-dated futures from the fear
perspective at present after ECB officials woke the market up to
threats to the inflation target. The 2012 strip of futures fell by as
much as five basis points on Friday. Conversely gilt buyers pushed the
cost of government borrowing lower with 10-year yields declining to
3.67% as the March future rallied 24 ticks to 117.23.
*European bond markets -* The 90-day euribor strip edged down lifting
implied yields by three basis points after ECB member Tumpel-Gugarell
served up a strong criticism of member governments' failure to
implement properly the concept of monetary union. March bunds rallied
later in the European afternoon as fixed income bidding increased with
the contract putting in new intraday highs at 123.67. Investors
ignored earlier signs of weakness in terms of a rise in fourth quarter
unemployment and a dip in Italian consumer confidence.
*Japanese bonds* - Japanese economic data improved with unemployment
falling and the pace of deflation abating somewhat. Earlier in the
week S&P delivered a credit downgrade, but this still failed to deter
fixed income buyers who today looked at regional weakness for equity
markets and a rebound in the yen and determined that yields remain
high enough to warrant locking in. The March JGB contract added eight
ticks to close at 139.86 yielding 1.21%.
*Australian bills* - The tax levied on middle-to-higher income earners
in Australia to help pay for flooding damage has eased a little of the
pressure on the RBA to maintain ots policy of tightening interest
rates. Short-dated bill contracts advanced spurred by a dip in Asian
benchmark stock indices. Government bonds were bought driving the
10-year yield lower to 5.50%.
Source: ActionForex.Com
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