Monday Interest Rate Brief

Yields are higher as investors react to what many in the market view as a hawkish stance from several Fed members. One of the leading proponents of the second round of quantitative easing, James Bullard said in a weekend speech that the Fed should closely examine existing stimulus at the April meeting. This and words of wisdom from other members have investors lining up their thought processes so far as what specific steps might make up an eventual exit from the prevailing accommodative stance.

Eurodollar futures – St. Louis Fed Chief James Bullard said the economy was in pretty good shape in a Marseilles address. He said that an eventual exit from its accommodative stance would likely commence by shrinking its balance sheet before preparing for an eventual rise in interest rates by removal of the “extended phase” from its policy statements. Eurodollar futures are trading with caution ahead of more discussion on monetary policy from Rosengren of Boston, Evans from Chicago and Atlanta’s Lockhart, who on Friday said that the current Fed stance was appropriate though he remained prepared to change position should recent inflationary pressures begin to stick. The short end of the curve has seen implied 90-day yields rise by six basis points while the June 1-0year note is close to a session low at 118-26 to yield 3.47%.

European bond markets – Stories that the new Irish government is pressing for senior shareholders in its nation’s banks to take on losses as it strives to achieve a lower rate on its bailout package raised concerns across European bond markets on Monday. The yield on benchmark Portuguese government debt rose to a record in sympathy with the rising prospect that the failed government will soon step-up to request a bailout from European Union partners. As risk appetite returns in other areas more of the shine is coming off bonds with German bund yields rising by two basis points to 3.29%. An inflation report due on Tuesday is expected to show prices rising at the fastest pace in two years. Euribor futures shed a further couple of basis points in the week ahead of a likely rise in official short rates at the ECB.

Japanese bonds – Investors stepped back further from government bonds at the start of the week as risk appetite around the world allowed the yen to rise and partially taking pressure off exporters’ earnings. Bond holders are also looking at the $308 billion catastrophe bill estimated by Prime Minister Naoto Kan and considering the possible damage to the nation’s fiscal health ahead of a likely storm of rescue-debt issuance. The 10-year JGB future slid by 27 ticks to 139.53 yielding 1.23%.

British gilts – Short sterling prices remain lower and in-line with losses seen by other global short ends despite the weekend interview with MPC member Adam Posen, who predicted that consumer prices would lurch sharply lower to 1.5% during 2012. The sole-proponent of additional quantitative easing expects government austerity measures to kick the consumer where it hurts causing economic weakness and a drop in inflationary pressures. Just last week the Bank predicted that nearby consumer price pressures would accelerate to beyond 5% before falling. All along the majority vote has argued that price pressures are commodity-driven and given the pace of slack across the economy will not feed through into wage pressures. Implied three-month cash rates rose by three basis points while June gilt futures are lower by 14 ticks to 117.70 yielding 3.62%.

Canadian bills – The strengthening of the greenback on economic recovery grounds has rejuvenated the case for monetary policy tightening at some stage in Canada. The view has caused losses for 90-day bills of acceptance futures contracts where yields have risen by around five basis points. The June government bond futures contract has lost 50 ticks to trade lower at 120.48 to yield five basis points more at 3.28%.

Australian bills – Yields rose by four basis points in Sydney to 5.48% as growing risk appetite propelled the Aussie dollar to its highest since it was freely floated in 1983. Bill prices fell increasingly at further maturity dates with the March 2012 contract losing seven basis points to yield 5.21% compared to the current 4.75% official short rate set by the RBA.