SCOREBOARD: Bond voyage

US bonds join the global sell-off as confidence stabilises there and in Europe.

The sell-off in global bonds continued overnight and there were some big moves. The US 10-year yield for instance is up another 12 basis points overnight to 2.27 per cent, which brings the move over the last week or so to over 30 basis points. The 10-year gilts rose 17 basis points overnight to 2.34 per cent, while for bunds, the 10-year yield is up 13 basis points to 1.95 per cent. As I discussed earlier in the year I think this was always the most likely path for bonds this year what with Europe calming down and US economic data likely to surprise on the upside.

It has, and now even the Fed is more optimistic, well, less pessimistic – marginally. How long each episode lasts is the zillion-dollar question. That the Fed still wants to print, I don’t doubt for one second. Moreover, and as I mentioned a few years ago, in a world where there is so much cash that people just don’t know what to do with it, volatility isn’t going anywhere – although the Vix index has fallen sharply of late – now down to 15.7 from almost 50 late last year. Sentiment is the key.

For now, I still think we are recovering from the extreme pessimism of late last year – and by we I mean the rest of the world. Australian confidence is actually getting worse, despite the RBA having cut rates, which as regular readers will know I think you can put down to confirmation bias. The RBA cut rates – things must be bad. Hopefully Thorpey can provide a much need distraction. Anyway, for the rest of the Treasury curve, the 5-year yield was up 11 basis points to 1.11 per cent and the 2-year rose just over 4 basis points to 0.39 per cent. Aussie futures followed suit but outperformed with the 3s down 5 ticks to 96.2945 and the 10s down 7 ticks to 95.820.

The other development worth noting is the new found love for the US dollar. Previously an increase in risk appetite was associated with with a weaker dollar, the reverse seems to be the case now. Again, things are in a state of flux and it’s not clear to me at this point whether this represents a change in trend. For last night, the Australian dollar was off 70 pips or so to 1.0448, euro fell about 20 pips (from 1630 AEDT) to 1.3026, while GBP was little changed at 1.52679 (almost a big figure range).

In the equity space, European stocks had a bit of a mixed session with the Dax up 1.2 per cent, although the CaC was weaker at 0.4 per cent and the FTSE fell 0.2 per cent. It was similarly mixed in the US and markets closed with the S&P500 down 0.1 per cent (1394) but the Dow up about the same (13194). On the S&P most sectors, bar tech stocks, fell although the big falls were in utilities, energy and basic materials. Obviously from that you can tell there wasn’t a lot of interest in commodities overnight, despite the weaker US dollar. So gold fell $40 ($1642) on lower risk aversion, copper was off 1.7 per cent and silver fell 4 per cent. In the crude space, both WTI and Brent were off 0.9 per cent to $105.7 and $125 respectively. Back in equity land, the Nasdaq rose 0.03 per cent (3040), while the SPI fell 0.4 per cent (4274).

There wasn’t really a lot of data or news flow to go off last night. Nothing big anyway. In the US, import prices rose 0.4 per cent in February and are 5.5 per cent higher annually. The current account then widened to $124.1 billion in the fourth quarter from $110.3 billion. The Bernanke spoke, and said the recovery was disappointing or slow or whatever but didn’t say much else. In Europe, CPI was unchanged in February at 2.7 per cent year-on-year, while industrial production rose 0.2 per cent in January after a 1.1 per cent fall to be 1.2 per cent lower annually. UK unemployment was unchanged at 8.4 per cent in the three months to January and finally the Norges Bank cut rates 25 basis points to 1.5 per cent.

That’s it. Looking at the day ahead, we get car sales for Australia at 1130 AEDT and the RBA bulletin at the same time. Tonight, watch out for a run of US data including the Empire manufacturing survey, producer prices, then Philadelphia Fed index and of course initial jobless claims.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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