Interest Rates, Worldwide

Interest rate futures contracts are widely traded throughout the world. The most popular futures contracts for each country are generally the 10-year government bond and the 3-month interest contract. 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 10-year German Bund futures contract traded at the Eurex and rallied sharply and posted a record high of 120.00 in June 2003. However, the Bund then backed off through November and traded sideways into December, finally closing the year at 112.53, only slightly above the 2002 close of 112.23. The Bund in 2003 basically tracked the movement in US T-Notes, rallying early in the year on the Iraq war and then trailing off later in the year due to the upward rebound in the European and general world economies. The 3-month Euribor contract rallied sharply into June and then traded sideways for the remainder of the year in the narrow range between 97.80 (2.20%) and 98.00 (2.00%) on the weekly nearest futures chart.

The European Central Bank (ECB) in 2003 cut its key refinancing rate by a total of 75 basis points, with a 25 basis point cut to 2.50% on March 7 and a 50 basis point cut to 2.00% on June 6. Despite the 75 basis point rate cut, the ECB’s key rate of 2.00% in the latter half of the year was still a full 100 basis points higher than the US Federal Reserve’s federal funds target rate of 1.00%, even though the European economy during 2003 was weaker than the US economy. That left the ECB open to charges of being overly hawkish with its monetary policy. Moreover, the sharp rally in the euro during the year also had the effect of dampening the European economy via lower exports. The euro ended 2003 more than 50% above its record low against the dollar in 2000 and was up 34% from its 2002 average. As 2003 ended, the ECB was under pressure to counteract the impact on the strong euro, either through talking down the euro, through currency intervention, or through some easing of monetary policy.

UK – The 10-year Gilt contract traded at the Liffe Exchange in London and rallied into June to post a record high of 124.77 but then sold off sharply through November, finally closing the year near 117.07. Gilts in the latter half of 2003 were much weaker than the German Bund because the UK economy in 2003 proved to be much stronger than in continental Europe. The Bank of England in early 2003 cut its base rate by a total of 50 basis points with a 25 basis point cut on February 6 to 3.75% and another 25 basis point cut on July 10 to 3.50%. However, the BOE was then forced to raise the base rate by 25 basis points to 3.75% on November 6 due to the strong UK economy, strong consumer credit growth, and a torrid real estate sector. With its base rate at 3.75%, the UK key reference rate was a hefty 275 basis points above the Federal Reserve’s 1.00% federal funds rate target.

Canada – The Canadian 10-year T-note futures contract traded at the Montreal Exchange and rallied in April and May to peak at a record high of 114.09 in June. The contract then fell back into the relatively narrow trading range of 107-110 through the remainder of the year, tracking US T-Note prices fairly closely. The 3-month Bankers Acceptance futures contract traded at the Montreal Exchange and rallied from April through October and closed the year near 1-3/4 year highs of 97.425 (or 2.575%). The Bank of Canada in 2003 raised its overnight target range by a total of 50 basis points in early 2003 (+25 basis points on March 4 and +25 basis points on April 15) to 3.25%, but then reversed that with a 50 basis point rate cut during mid-year (-25 basis points on July 15 and –25 basis points on September 3). The Canadian economy was hurt during the year by the impact from mad cow disease and from the SARS outbreak that hit Toronto. In addition, the Canadian dollar rallied sharply against the US dollar during 2003, causing concern about lower exports to the US. However, as 2003 ended, the Bank of Canada was fairly confident about the prospects for the Canadian economy.

Japan – The 10-year JGB futures contract at the Simex rallied steadily in early 2003 to post a 145.03 on the weekly nearest futures chart. However, the contract then sold off sharply in the July-September period as signs finally emerged of a recovery in the Japanese economy. JGBs finally closed the year at 137.41, about 4-1/2 points lower than the 2002 close of 141.98. The 3-month Euroyen contract at the Simex traded sideways all year in the extraordinarily narrow range of 99.90 to 99.95 (10-15 basis points). Short-term rates were locked near zero due to the Bank of Japan’s continued zero-interest-rate monetary policy. The Bank of Japan (BOJ) in 2003 left its monetary policy unchanged all year with its overnight rate set only a few basis points above zero. The Bank of Japan in 2003 finally appeared to be making a little headway in stimulating the economy and trying to get a sustainable economic expansion going. The 1990’s were basically a lost decade for Japan which suffered from the severe hangover from the real estate and stock market bubble of the late 1980’s. Japanese monetary policy was basically caught in a classic liquidity trap through 2003 whereby even zero interest rates and a huge amount of excess reserves were ineffective in stimulating the economy because of the crippled banking system and the lack of credit demand from Japanese consumers and businesses. However, as 2003 ended, the Japanese government was making some headway on reforming the Japanese banking system and the Japanese economy was picking up, raising hopes that the Japanese economy in 2004 might finally display the long-awaited recovery.