Eurozone government bonds rallied following a second successful day
of auctions that removed more of the recent pressure on governments
thought likely to struggle to tap investors for cash in the capital
markets. Central banks in Europe kept policy unchanged as expected
but a cautious Jean-Claude Trichet kept bond investors on their toes
as he suggested a worsening of the inflation climate.
*European bond markets –* Spain and Italy found more willing buyers
for bonds stretching across a variety of maturities today than they
had bonds for sale. Investors had spent days fretting that not enough
patrons would show up while recent overtures from officials from China
and then Japan helped smooth the passage. Italian and Spanish yields
at the 10-year horizon saw double-digit declines while Belgian and
Greek debt prices also rose sharply. Following the ECB's regular
meeting Mr. Trichet warned that price risks may rise in the region
saying that "inflation rates could temporarily increase further."
He was speaking on the day when a German report showed a jump in
wholesale inflation with factory prices accelerated by 1.8% during
December to a pace almost three-times the rate in the prior month.
March German bunds have nevertheless rebounded from a session low at
124.27 inspired by Mr. Trichet's comments and recently traded at
124.58 where the yield picked up to 3.06%.
*Eurodollar futures –* The U.S. yield curve has responded little to
a surprise increase of 35,000 in initial claims data through last
weekend. Continuing claims dipped to the lowest level since October
2008 and offer some crumbs of comfort to those concerned that the
recovery is slowing. March treasury note futures rallied before
returning to negative territory for the session and traded recently at
120-16 to yield 3.38%. Eurodollar futures are marginally weaker on the
day.
*Japanese bonds* – Equity prices stretched to a five-day gain for
the best string of gains in seven months. The optimistic tone saw
investors continue to lighten up on bonds sending the March future
down eight ticks to 140.08 where yields rose to 1.19%. Data indicated
a surprise decline in machinery orders through November, but the 3%
decline is now old news and didn't impact the tone in fixed income
today.
*British gilts* – The Bank of England took its foot off the neck of
credit markets on Thursday and announced no change in monetary policy.
While nobody predicted any change in the bank's monetary stance, the
team faces a three-way split over the future course for policy in
light of a tightening in the fiscal stance and stubbornly high
inflation. Investors recently started the process of sharpening up the
yield curve in the expectation that the bank may at some unspecified
point start to think about pulling the policy chain. Gilt futures rose
today sending the 10-year yield lower by one basis point to 3.62%.
Short sterling futures made gains while other short ends were moving
in the opposite direction with implied yields dipping four basis
points are longer maturities.
*Australian bills* – A standstill for the employment report saw just
2,300 more employees enter the workplace in December contrasting with
expected job creation of 25,000. Implied yields nevertheless jumped
wiping out an earlier in the week slide as dealers priced out further
monetary tightening from the Reserve Bank. Bill prices for 90-day
maturities tumbled around 10 basis points sending expectations for
tighter policy later in the year and beyond back on the cards.
*Canadian bills –* March government bond futures fell harder than
treasury prices sending yields on the 10-year paper higher by a couple
of basis points. The yield gap between the two duly narrowed to just
10 basis points. Bill prices fell sharply sending implied yields
higher by six basis points.
Source: Fxstreet.com
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