Treasuries Turn Sour after Positive Start

Trading has all but dried-up as all but the die-hard investors leave their desks for New Year celebrations. The year has been characterized by two extremes: Fears that the European sovereign debt crisis would drag down the global economy in to a second-wave of recession were soothed as the U.S. economy rebounded strongly. Typically with any recovery comes a reversal of monetary stimulus. Yet since the Federal Reserve has only recently embarked upon a second wave of easing, the prospects for yields in 2011 couldn't be murkier.

Eurodollar futures - The March 10-year note future has surrendered earlier gains and the contract has turned lower trading at 119-30 to yield 3.33%. In the big scheme of things that represents a decline of 50 basis points for the year as a whole, yet is a full 1% higher than as recently as October 8 when investors frantically anticipated the Fed's so-called QE2 policy of acting as a buyer in the bond markets to drive yields lower. Eurodollar futures have also recently erased gains and are flat on the day.

British gilts - The domestic market closed early with the March future rallying hard in-line with a more optimistic tone in the U.S. market. Short sterling futures also built on earlier in the week gains. The only notable data release was a bullish housing price report from the Nationwide showing home prices unexpectedly gained in November. The March gilt future closed at 119.44 to yield 3.39% for a decline during 2010 of 62 basis points.

Australian bills - Bonds were yielding an unchanged 5.58% at the end of the year and only four basis points lower than a year ago. Australia is in the minority of countries that skirted recession creating its central bank with the dilemma of having to embark early on tightening monetary policy.

Canadian bills - Mach government bond futures are flat at 122.09 to yield 3.14%. At the outset of 2010 the 10-year yield was 3.60%. While the central bank is in monetary tightening mode, it has to watch its step carefully on account of events in the neighboring U.S., which is its biggest market. But bond yields have also remained steady in light of the rising climate for its monetary policy on account of the nation's fiscal health. Canada expects to return to fiscal balance within five or six years unlike many nations who remain strangled by budget deficits. Short-end futures have subsequently come off earlier highs in the day.

European bond markets - Markets closed.

Japanese bonds - Markets closed.