IB Interest Rate Brief

Yellen's words soothe rate frustrations

Just a tad of risk aversion this morning is keeping bonds afloat and yields down. The picture seems to repeat itself across major market centers. Words from the likely future vice chairwoman at the Fed provided reassurance that the rates are likely to remain on hold adding a further fillip to bond prices. Tensions in European bond markets remain a dead weight on short interest rate implied yields.

Eurodollar futures - Janet Yellen, the San Francisco President at the Federal Reserve, revealed an upbeat assessment of the U.S. economy and also let loose how recent data had caused her to view formation process to "turn the corner." She said that such was the pace of the rebound that "at some point" officials at the Fed would have to consider how to withdraw the stimulus measured in place. However, she said it was also important not to lose sight of the fragility of the recovery, which would continue to require accommodative monetary policy for some time to come. Notably, she predicted that the recovering job market would leave the rate of unemployment at around 9.25%.

Eurodollar futures are higher by four basis points implying lower interest rates. The 10-year yield has slipped to 3.81%

European bond markets - Peripheral bonds remain under stress with Portuguese and Greek price slipping as the cushion investors demand creeps higher. Discussions between the Greek Finance Ministry and the European Central Bank go ahead in Athens starting on Monday after Prime Minister Papandreou called on the EU and IMF to discuss financial assistance. Euribor futures are higher again by three pips while June bund prices are higher at 123.16 sending yields on German government debt down to 3.11%.

Japanese bonds - A stronger Japanese yen accompanied by a slide in the Nikkei helped shave two basis points off Japanese bond yields. The 10-year slipped to 1.33% in yield terms after Chinese measures aimed at cooling speculation in the housing market dampened sentiment.

British gilt - British credit markets joined in the yield decline party after an unexpectedly robust performance by the Liberal Democrat leader, Nick Clegg. According to a poll after the televised political debate, 61% of those polled said his performance won the debate against Prime Minster Brown and leader of the opposition and likely future PM, David Cameron. The emergence of the minority party as a threat to the political landscape has the possibility of muddying the outcome and thereby making fiscal decisions all the more difficult to implement. Gilt futures added 36 pips to 114.26 as the 10-year yield slumped by four basis points to 3.98%.

Australian bills - The Australian yield curve slipped by three basis points on account of the Chinese measures to dampen growth from an 11.9% first quarter pace. Bond yields also eased by four basis points to 5.80%.

Canadian bills - Canadian government bonds rose in line with treasury prices sending the yield down to 3.69%. Bill prices also rose by five basis points at the front end of the curve as investors sense no change at next week's Bank of Canada meeting.