Interest Rates, Worldwide
Interest rate futures contracts are widely traded throughout the world. The most popular futures contracts are generally 10-year government bonds 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 - The Eurex 10-year Euro Bund futures contract fell in the first half of 2007 by about 6 full points. However, Euro Bund futures after the credit crisis began in August rallied for the second half of the year to regain most of its losses and close at 113.11, down -2.92 points on the year. The German 10-year government bond yield in 2007 rose sharply in the first half of the year to a 5-year high of 4.64% in June 2007, but then fell back in the second half of the year to close at 4.28%, up 53 bp on the year. The 3-month Euribor in 2007 moved higher in the first half of the year and then spiked higher during the credit crisis, finally closing the year at 4.95%, up 127 bp on the year.
European interest rates rose in the first half of 2007 as the European Central Bank (ECB) continued its rate hike regime and implemented a 25 bp rate hike in March and again in June. The final two rate hikes brought the overall rate hike to 200 bp from the 2.00% level that prevailed in mid-2003 through late-2005 to 4.00% by June 2007. The ECB raised its benchmark rate over that time frame due to the improvement in the Euro-Zone economy and rising inflation. The Euro-Zone GDP on a year-on-year basis moved higher from the 1% to 2% range seen in 2004-2005 to a 2% to 3% range in 2006-2007. The Euro-Zone GDP peaked at +3.2% in Q4-2006 and then tailed off to +2.2% by Q4-2007.
When the U.S. sub-prime mortgage crisis arrived in force in August 2007, Euro Bund yields fell sharply along with U.S. Treasury yields. Unlike the Fed, however, the ECB refused to cut its benchmark rate because of its ongoing concern about inflation. The ECB instead injected reserves into the European banking system to maintain liquidity. The Euro-Zone CPI spent the first half of 2007 in the 1.8-1.9% range but then climbed as high as +3.1% by the end of the year due to rising energy and food costs. Due to rising inflation, the ECB kept up its hawkish inflation rhetoric all year, even after the credit crisis began, consistently indicating that it was leaning if anything towards higher rates. Nevertheless, as of early 2008 the market was expecting at least one 25 bp rate cut from the ECB by the end of 2008.
UK - The Liffe 10-year Gilt futures contract in 2007 displayed a similar pattern to that of T-note priced and Euro Bund prices, selling off sharply early in the year and then rallying in the second half of the year. The Liffe 10-year Gilt futures closed 2007 at 110.23, up 2.10 points on the year. The 10-year Gilt yield rose from 4.51% at the beginning of 2007 to an 8-year high of 5.56% in July 2007. However, the 10-year Gilt yield then fell back in the second half of the on the credit crisis and closed 2007 at 4.51%, unchanged on the year. The 3-month UK Libor rate rose in the first half of 2007 and then spiked higher during the credit crisis, finally closing 2007 at 6.50%, up 71 bp on the year. The Bank of England implemented three 25 bp base rate hikes in the first half of 2007, bringing its 2006-07 overall rate hike to a total of 125 bp, from 4.50% in August 2006 to 5.75% by July 2007. However, the BOE was then forced by the credit crunch into two 25 bp rate cuts, one in December 2007 and the other in February 2008, which left the base rate at 5.25% by February 2008.
Canada - The Montreal Exchange's Canadian 10-year government note futures contract fell by about 5 full points in the first half of 2007, but then rallied in the second half of the year to close 2007 at 114.92, up 1.10 points on the year. The Canadian 10-year government yield rose in the first half of 2007 to a 3-year high of 4.76% in June 2007, but then fell back in the second half of the year to close 2007 at 3.86%, down 10 bp on the year. The 10-year government yield continued lower in early 2008 to a new record low of 3.50%. The Bank of Canada in July 2007 raised its key lending rate by 25 bp to 4.50%, but then implemented a total of 100 bp of easing from November 2007 through March 2008 in response to the credit crunch, leaving its key lending rate at 3.50% in early 2008. Canada's GDP growth climbed steadily from the 2% area at the end of 2006 to a peak of +3.0% in late 2007, but then fell sharply to +2.0% in December 2007, necessitating the Bank of Canada's rate cuts.
Japan - The SGX 10-year JGB futures contract followed a similar pattern to that of the other G7 nations, selling off in the first half of the year and then rallying in the second half of the year. JGBs finally closed 2007 at 136.76, up 2.83 points on the year. The 10-year JGB yield moved sideways in early 2007, moved sharply higher to a 1-1/2 year high of 2.00% in June 2007, but then steadily fell through the remainder of the year to post a 2-year low and close at 1.56%, down 7 bp on the year. The Bank of Japan raised its overnight benchmark rate by 25 basis points to 0.25% in July 2006 and then implemented a further 25 basis point rate hike to 0.50% in March 2007. The BOJ then left its overnight rate unchanged through the remainder of 2007 as it dealt from the fall-out from the credit crisis that mostly affected the U.S. and Europe. Japan's GDP growth rate averaged about 2.0% during 2007.