England's four-times a year report on inflation. The central bank
scotched concerns that it should bring to somebody's attention rates
immediately to address price pressures bent by surging commodity
costs. Governor King made the pressing point in his opening remarks at
a press conference that monetary policy must be forward-looking rather
than dealing with the here-and-now. His thought process was later
echoed by a continental speaker who also allayed inflationary concerns
and in the process helped spark life in to bond prices that recently
fell to the lowest in nearly a year.
*Eurodollar futures -* Treasury futures reversed earlier gains having
matched a last Friday's high. Yields changed course following a strong
showing for housing starts and a marginally better than expected
reading for building permits, a harbinger of future activity for
builders*.* March treasury futures reached 118-29 ahead of the data
pressing the benchmark yield back beneath 3.60%. Dealers were also
responding to a rise in the reading of core producer prices stripping
out food and energy costs. The January report rose more than twice the
expected rate coming in at 0.5% lifting the annual pace of producer
inflation to 1.6% after 1.3% in December. Eurodollar futures abruptly
changed direction with far-dated maturities worst unnatural. For
example the December 2012 contract gave up two basis points on the day
to imply a cash yield of 2.22% having earlier traded to imply a lower
yield of 2.13%.
*British gilts* - Earlier in the day the Bank of England's quarterly
inflation report had fixed income dealers breathing slightly simpler,
with enthusiasm for low and stable interest rates quick returning.
Gilts popped higher to trade at 116.44 in the March contract before
responding to the strong U.S. data. The contract recently traded down
to 116.18 although still remains well in positive territory for the
day. The Bank stated that it still expects inflation to fall back
below the 2% target rate after two years adage that the fourth quarter
contraction for GDP materially unnatural its projections adversely.
Investors subsequently scaled back their lofty expectations for
firming monetary policy lifting small sterling futures in the process.
The December 2012 expiration went away from a forecast yield of 3% to
reach 2.84% at its most bullish point of the day.
*Canadian bills -* Canadian government bonds were sharply ahead
earlier in the day with the March future success 119.96 as it
responded to the rhetoric from the Bank of England and matched a dip
in U.S. yields. But, following firmer U.S. data dealers sold the
contract, which had been 42 pips higher at one point, into the red for
the day albeit for a brief period of time. Domestic data also revealed
some weakness with manufacturers only moving slowly ahead in December
compared to forecast. Bill prices remain in the black so far with
implied cash prices a couple of basis points lower.
*European bond markets -* Soothing words from ECB member Guy Quaden
helped soothe fears over inflation sending European bond yields
sharply lower. Mr. Quaden suggested that euro-area inflation will
likely "progressively decelerate in the following half of the
year," sounding very much like the Governor of the Bank of England.
German bunds exploded to the upside to reach 123.44 at the session
high shaving seven basis points off yields, which lately have reached
10-month highs.
*Japanese bonds* - Dealers used in part the defense of a weaker than
hoped for five-year auction as reason to sell bonds. Fewer investors
than previously showed up to buy an equivalent of around $25 billion
government bonds today with a wider tail also dragging on prices. But,
the weakness in the yen caused by glowing attitude towards the
recovery and as the Japanese shake off a dull patch of economic
activity, is also undermining demand for bonds. The 10-year yield
stretched to a 10-month high overnight closing at 1.34% as March JGB
futures gave up 47 ticks to 138.51.
*Australian bills* - Australian markets were silent with government
bonds adding two basis points to close at 5.68% and below a recent
peak at 5.75%. A leading index compiled using December statistics and
therefore pre-flooding went unnoticed although pointed to healthful
mid-year expansion. 90-day bill prices eased a couple of basis points.
Source: ActionForex.Com
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