Interest rate futures contracts are widely traded throughout the world. The most popular futures contracts are generally the 10-year government bond and the 3-month interest rate contracts. In Europe, futures on German interest rates are traded at the Eurex Exchange. Futures on UK interest rates are traded at the Liffe Exchange in London. Futures on Canadian interest rates are traded at the Montreal Exchange. Futures on Japanese interest rates are traded at the Singapore Exchange (SGX) and at the Tokyo Stock Exchange. A variety of other interest rate futures contracts are traded throughout the rest of the world (please see the front of this Yearbook for a complete list).
Euro-Zone - Interest rates in the Eurozone dropped very sharply in 2014 as the Eurozone sovereign debt crisis receded, allowing not only German and French yields to drop but also the yields of fiscally-troubled Eurozone countries such as Spain, Italy, and Portugal. The German 10-year bund yield fell from 1.93% at the beginning of 2014 to a record low of 0.30% by early 2015. The French 10-year bond yield fell to 0.54% by early 2015.
By early 2015, the 10-year bond yields fell to 1.50% for Spain and 1.57% for Italy. By early 2015, 10-year bond yields also fell to 2.21% for Portugal and 1.09% for Ireland, which were near or below the U.S. 10-year T-note yield of 2.11% at the time. That illustrated that investors were much less worried about the Eurozone debt crisis since they were willing to take a lower yield on an Irish bond then they would for a U.S. bond.
Greek voters in early 2015 voted the anti-austerity Syriza party into power. Even though the Syriza party initially demanded a write-down of its debt load and the end of its bailout conditions, the markets did not panic and virtually no contagion risk spread to other Eurozone countries. Eurozone officials and Greece in February 2015 agreed on a 4-month extension of its bailout program to the end of June 2015 to give time to negotiate a new long-term bailout package.
The ECB in 2014 cut its refinancing rate twice, once in June 2014 by 10 bp to 0.15% and again in September by another 10 bp to 0.05%. The ECB also took the rather drastic step of cutting its deposit rate to the negative level of -0.20% in September. The ECB in January 2015 also announced a large quantitative easing (QE) program involving the purchase of 60 billion euros per month of sovereign bonds. The ECB said it intends for the program to last from March 2015 through September 2016 and for the program to total at least 1.1 trillion euros. The ECB's rate cuts and QE program were instrumental in driving down Eurozone bond yields.
Eurex Euro Bunds rallied fairly steadily in 2014, posting a new record high and closing the year up +16.70 points at 155.87. Bullish factors for bund prices in 2014 included (1) the threat of deflation with the CPI dropping into negative territory by early 2015, (2) the weak Eurozone GDP growth rate during 2014 of +0.8%, and (3) the ECB's QE program and its cut in the refinancing rate to 0.05%. The German 10-year bund yield during 2014 fell sharply to close the year at 0.54%, down 139 basis points from 1.93% at the end of 2013. The 10-year bund yield in early 2015 then continued to fall and hit a new record low of 0.30% on January 30, 2015.
UK - The Liffe 10-year Gilt futures contract during 2014 rallied from a 6-1/2 year low of 106.00 in January 2014 to close the year up +12.97 points at 119.53. The 10-year gilt yield fell sharply by 126 basis points during 2014 from 3.02% at the beginning of the year to 1.76% at the end of 2014. The sharp drop in the UK gilt yield was driven by the same forces that drove U.S. and Eurozone bond yields sharply lower, i.e., weak global economic growth, expansionary monetary policy, and a sharp drop in inflation expectations tied in part to the plunge in crude oil prices. The Bank of England left its monetary policy unchanged during 2014. The BOE left the base rate at 0.50% where it has been since early 2009. The BOE did not engage in bond purchases during 2014 and left its asset purchase target at 375 billion pounds all year. UK GDP growth in 2014 improved to +2.7% from +1.7% in 2013 as the UK economy gained traction, posting the best growth rate since 2006. The UK core CPI fell during 2014 and the relatively low level of +1.3% seen in December 2014 meant that the BOE was not under pressure to raise interest rates in response to stronger UK GDP growth.
Canada - The Montreal Exchange's Canadian 10-year government note futures contract started out 2014 at a 3-1/2 year low but then rallied sharply during the year to close +11.78 points higher at 138.52. The Canadian 10-year government bond yield moved sharply lower to close the year down -97 basis points at 1.79%. The Canadian 10-year government bond yield fell during 2014 along with other G-7 bond in response to weak global economic growth and falling inflation. The Bank of Canada (BOC) during 2014 left its policy interest rate unchanged at 1.00%, the same level that prevailed since September 2010. However, the Bank of Canada finally cut its policy rate by 25 bp to 0.75% in January 2015 in response to lower inflation and the hit that Canada's economy took from the late 2014 plunge in oil prices. Canada's GDP weakened to 2.2% in Q4-2014 from the strong average growth rate of +3.3% seen in Q2-Q3 2014, thus drawing the easing move from the Bank of Canada.
Japan - SGX 10-year JGB futures rallied steadily during 2014, closing the year up +4.57 points at 147.84. JGB futures rallied further in early 2015 to post a new record high of 148.67. Japan's 10-year government bond (JGB) yield fell steadily during 2014 by 42 basis points from 0.75% at the beginning of the year to close the year at 0.33%. The 10-year JGB yield then fell further in early 2015 to a new record low of 0.20%. Factors leading to the sharp decline in yields included (1) the shaky Japanese economy which experienced a recession in the middle of 2014 in response to the April 2014 hike in the sales tax to 8% from 5%, (2) the Bank of Japan's aggressive bond buying program that soaked up JGBs, and (3) the sharp decline in inflation expectations tied to the plunge in crude oil prices. Japan's GDP fell to unchanged in 2014 from +1.6% in 2013 and is expected to recover to only +1.0% in 2015.
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