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 all-electronic Eurex Exchange in Frankfurt. 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 (Simex) 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 - After nearly three years of dithering by Eurozone political officials, the European Central Bank (ECB) in September 2012 announced its "Outright Monetary Transactions" (OMT). Under the OMT program, the ECB is authorized to buy an uncapped amount of bonds in the secondary market with a maturity between 1 and 3 years issued by countries that agree to participate in the program and engage in major restructuring.
The ECB's OMT program finally convinced the markets that the ECB was serious about using its unlimited balance sheet to snuff out the crisis. In fact, bond yields of the troubled Eurozone countries fell sharply in late 2012 and remained low all through 2013. The Spanish 10-year bond yield fell from 7.5% in summer 2012 to about 5% by the end of 2012 and then fell further to 3.80% by early 2014. Portugal's 10-year bond yield fell from a peak of 17% in spring 2012 to 7% by the end of 2012 and then moved lower to 5.20% by early 2014. While the Eurozone debt crisis cooled in 2013, the Eurozone is not completely out of the woods. Portugal is likely to need a second bailout when its first program runs out in May 2014 and Greece will likely need a third bailout in summer 2014.
The ECB in 2013 cut its refinancing rate twice. The ECB cut its refinancing rate by -25 bp to 0.50% in May 2013 and then by another -25 bp to 0.25% in November 2013. The ECB's rate cuts were designed to further ease liquidity conditions and lift the Eurozone economy out of recession. As part of its rate cut in May, the ECB also cut its deposit rate to zero as a means to encourage banks to put their excess reserves to work with more lending and not leave those reserves sitting in the ECB's deposit facility.
The ECB also cut rates in 2013 to prevent the Eurozone economy from falling into a long-term bout with deflation. The Eurozone CPI fell as low as +0.7% by late-2013, well below the ECB's target of just below +2.0%.
Eurex Euro Bunds in Q1 2013 traded sideways just below the record high from June 2012 as the Eurozone economy weakened. Bund prices shot higher in Q2 and posted a fresh record high in May at 147.20 after the ECB cut interest rates. Bund prices then tumbled in Q3 and fell to a 2-year low of 136.60 in September as the Eurozone economy recovered when Eurozone Q2 GDP grew by +0.3% q/q, the first positive GDP growth rate in seven quarters. Bund prices rebounded slightly into year-end and finished 2013 at 139.17, down 6.47 points from the year-earlier close of 145.64.
UK -The Liffe 10-year Gilt futures contract moved higher in the first half of 2013 and posted the high for the year in May at 120.57. Gilt futures prices then plunged in the second half of 2013 to post a 5-1/2 year nearest-futures low in December at 106.00 and finally finish the year at 106.56, down -12.36 points from the year-earlier close of 118.92. After posting the low for the year in May at 1.611%, the 10-year UK gilt yield moved sharply higher the rest of the year and ended 2013 at a 2-1/2 year high of 3.022%. Gilts were undercut in 2013 amid speculation the Bank of England (BOE) would have to start increasing interest rates sooner than the market had previously thought due to stronger UK economic growth. UK 2013 November mortgage approvals rose to a 4-year high of 45,044 and UK Q4-2013 GDP expanded at a +2.7% y/y pace, the fastest in more than 5 years. Also, gilts lost some safe-haven demand as the European debt crisis receded. The BOE during 2012 maintained its extremely easy monetary policy with the base rate at 0.50% and kept its quantitative easing program on hold the entire year with an asset purchase target of 375 billion pounds.
Canada - The Montreal Exchange's Canadian 10-year government note futures contract moved higher into Q2 of 2013 and posted the high for the year in May. 10-year Canadian note futures slumped the second half of the year and finished 2013 at a 2-1/2 year low. The Canadian 10-year note yield posted the low for the year at 1.68% in May 2013 and then surged to a 2-1/2 year high of 2.82% in September and finished 2013 at 2.76%. The Bank of Canada (BOC) during 2013 left its policy rate unchanged at 1.00%, the same level that prevailed since September 2010. Canada's core CPI in January 2013 fell to a 3-year low of +1.0%, just above the record low of +0.9%, which reduced pressure on the BOC for a rate hike. In fact, BOC Governor Poloz in December 2013 said that interest rates may remain unchanged for "quite some time" due to deflation concerns. Canada's 2013 GDP improved to +2.0% from +1.8% in 2012.
Japan - The SGX 10-year JGB futures rallied in early 2013 and posted an all-time nearest-futures high of 146.45 in April 2013, while the 10-year JGB yield sank to a record low of 0.46% after the Bank of Japan (BOJ) massively expanded its quantitative easing program. The BOJ, under the leadership of its new chief Kuroda, said in April that it would start buying 7 trillion yen ($75 billion) of government bonds per month for at least two years or until the inflation rate reaches 2% from the then-current level of -0.7%. The Japanese 10-year bond yield then surged to a 1-3/4 year high of 0.93% in May when Japanese Q1-2013 GDP expanded at a +4.5% q/q annualized pace, the best in 2-years, and after Japan's $1 trillion Government Pension Fund, the biggest in the world, said it was considering changes to reduce its allocation of Japanese government bonds in the fund. Yields then trended lower as the economy slowed. The Japan 10-year bond yield finished 2013 at 0.73%, just below the year-earlier level of 0.80%.
Articles from the Commodity Research Bureau (CRB) Commodity Yearbook. The single most comprehensive source of commodity and futures market information available, the Yearbook is the book of record of the Commodity Research Bureau, which is, in turn, the organization of record for the commodity industry itself. Its sources - reports from governments, private industries, and trade and industrial associations - are authoritative, and its historical scope is second to none. Additional information can be found at www.crbyearbook.com.