Tuesday Interest Rate Brief

Bond investors are trapped in an awkward place as liquidity conditions remain extremely thin. A move towards lower yields in the U.S. is waning as supply and evidence of domestic recovery keep reminding investors that the highest yields in many months along the curve is perhaps not yet a viable proposition. Meanwhile European yields are trudging lower as investors fear that once New Year liquidity returns, so will the haunting theme of further sovereign defaults.

Eurodollar futures –

The U.S. curve was inspired to a better start by European activity where the curve moved definitively. Even a worse than expected reading for the S&P/Case Shiller house price report wasn’t enough, however, to maintain a bid behind bonds. Equity index futures pointing to a further improvement in risk appetite also pulled another prop of support from beneath the bond market. 10-year yields added a basis point to stand at 3.34% while the spread narrowed between it and the two-year maturity where the yield added two basis points to 0.688%. The Treasury issues a total of $99 billion in notes and bonds at several maturities this week.

Japanese bonds – A stronger yen helped burden the shoulders of economic hopefuls and caused buyers to step in to send the yield on the 10-year bond lower by four basis points to 1.11%. The fall took the yield on Japanese debt to the lowest in four weeks. The performance of the yen outweighed the impact of a strong reading from retail trades last month while industrial production was also unexpectedly strong. March JGB futures rose 45 ticks to 140.30 after consumer price data remained mired in negative territory.

European bond markets – Core European yields slid by seven basis points following a marginal downgrade to third-quarter French GDP. While the data may have influenced some of the move it’s most likely that the bigger inspiration is a fear that sovereign bonds will face renewed pressure when investors get back into full swing next week. The German 10-year yield slipped to 2.95% allowing an eight basis point widening in the premium commanded by investors to hold U.S. debt at the same maturity.

British gilts – Markets closed.

Australian bills – Markets closed.

Canadian bills – Markets closed.