Forex Investment and Currency Trading

Stock markets started the week in the black. In Europe, the largest gains were in Financials, after a gross underperformance. Bonds are hovering around key technical support levels, ahead of heavy issuance in both Europe and the US.

Overnight brought the minutes of the BoJ’s December policy meeting. The highlights are that there is little chance of any further cuts in the policy interest rate, but a strong likelihood the BOJ may introduce further measures to facilitate corporate financing. Outright purchases of corporate bonds may be on the cards. The next BoJ meeting is on 18-19 February.

Recent developments in bond markets should be placed in perspective. UST 10-yr bonds yielded 2.50-2.60% in mid-December. The announcement on 16 December that policy rates would be brought down to zero and that bond purchases were being considered triggered a sharp flattening rally, with US 10-yr falling to 2.0% by 30 December.

As Treasury yields backed up, the level of ‘distress’ in financial markets eased further. The improvement has been supported by the Fed’s Commercial Paper Funding Facility (CPFF) and the FDIC’s guarantee blanket for short term bank credit. Consequently, the the spread between 3-mth LIBOR-OIS, a bell-weather of counterparty risk has narrowed by a further 50bp. The level of corporate funding rates has also come down since last December. The same goes for the yield on current-coupon Agency-backed mortgage, which the Fed has recently started purchasing. Finally, the ‘mood’ in primary corporate markets is gradually on the mend.