Tuesday Interest Rate Brief

Rising risk appetite is creating a wall of resistance for bond buyers in North America. The wall of optimism that has ushered investors towards a positive year end earlier reached its peak by driving U.S. 10-year yields up above 3.50% sparking a wave of buying. Buyers have joined forces with the Fed whose regularly scheduled purchases yesterday included the largest ever in a single day. In Europe the mood is mixed as rising risk appetite boosted by soothing words from Beijing meets with yet another sovereign facing the possibility of a credit-rating downgrade.

Eurodollar futures – March treasury note futures have pared an earlier rally to 120-15 but remain higher on the day to yield 3.30%. On Monday the Fed as part of its asset-purchase plan purchased $14.6 billion in bonds spanning the yield curve. Today the central bank will buy a further $10.6 billion as part of its plan to maintain lower yields for borrowers.

European bond markets – Beijing said that it was impressed with the steps taken by Eurozone nations in dealing with the financial crisis and reining in budget deficits. China is a huge holder of Eurozone paper as it recycles its trade surplus. In October its Premier said that it wouldn’t bailout of the euro nor domestic paper and today that line of thought was bolstered as Vice Premier Qishan told reporters that China had taken positive steps in addressing a variety of problems stemming from the crippling collapse of financial markets. Still, by putting Portuguese sovereign credit rating on negative watch Moody’s ratings agency is keeping the wind blowing beneath peripheral nation’s yields. Portugal’s benchmark premium spread over German bunds widened for a tenth straight session. Opening declines for the March bund saw the contract trade to as low as 124.76 before European bonds rebounded as treasuries started the session on a positive note.

British gilts –British yields followed a similar pattern although gilts look a little more wobbly on Tuesday following a surge in the government’s borrowing requirement, which jumped to a record in November. Short sterling prices are travelling in no specific direction and remain unchanged. The March gilt future is currently lower by 30 ticks at 118.36 to yield 3.49%.

Japanese bonds – The Bank of Japan voted unanimously to maintain its low interest rates and asset-purchase plans at the final monetary policy session of the year. Demand for government bonds turned weaker in light of Chinese measures to bolster economic confidence through voicing an opinion on the Eurozone. March JGB futures declined by 15 ticks to 139.70 and carry a yield of 1.16%.

Australian bills – Minutes from the December meeting at the Reserve Bank at which monetary policy was left unchanged revealed that its members believe that after a string of seven interest rates increases, policy is now “mildly restrictive.” The central bank also nudged down fears over inflation prospects after household appetite for ever-increasing debt cooled somewhat and the savings rate appears to have risen. Nevertheless credit markets pointed to mildly higher borrowing costs but essentially in line with other leading market rates around the world. Short dated bill prices shed three basis points while the 10-year government bond yield rose by three pips to 5.54%.

Canadian bills – October retail sales data for Canada came in with a firm gain of 0.8% on the prior month, which was revised lower. However, earlier tame inflation data alleviated any fears that the Bank of Canada needs to tighten the monetary purse strings soon. Bill prices remain flat on the day while government bond futures are heading towards unchanged on the session despite an earlier healthy gain. The March contract stands at 121.87.