3-Month SONIA Mar '25 (J8H25)

Description

Interest rate futures contracts are widely traded throughout the world. The most popular futures contracts are generally 10-year government bonds and 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 ICE Futures Europe 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.

Eurozone - The Eurex German 10-year Euro Bund futures contract (Barchart.com symbol GG) moved slightly higher during 2023 and closed the year up +4.29 points at 137.22. The Eurex French 10-year OAT bond futures contract (Barchart.com symbol FN) also moved slightly higher during 2023 and closed the year up +4.21 points at 131.51. The Eurex Italy Euro BTP 10-year bond futures contract (Barchart.com symbol II) moved higher during 2023 and closed the year up +10.23 points at 119.15.

European 10-year bond prices posted their highs for the year in January 2023 on hopes that the European Central Bank (ECB) might slow its pace of monetary tightening after media reports said the ECB was considering raising interest rates by only +25 bp at the March policy meeting after a +50 bp rate hike in February.

At its February meeting, the ECB raised the deposit facility rate by +50 bp to 2.50% and said, "Rates still have to rise significantly." That fueled a slide in 10-year bund prices to a 12-year low in March. The ECB, at its March meeting, raised its deposit facility rate again by +50 bp to 3.00% and said, "Inflation is projected to remain too high for too long."

Inflation in the Eurozone remained sticky, with the Eurozone CPI in April rising to +7.0% yr/yr from +6.9% yr/yr in March, well above the ECB's 2.0% target. Despite the inflation pressures, the ECB slowed its tightening pace and raised the deposit facility rate by only +25 bp at its May meeting and by another +25 bp in June to 3.50%. The ECB maintained a hawkish stance in June as ECB President Lagarde said the ECB still had ground to cover in raising rates and was "very likely" to raise rates again at its July meeting.

The ECB in July raised its deposit facility rate by +25 bp to 3.75% and then raised that rate by another +25 bp to 4.00% at its September meeting. The ECB in September maintained its hawkish guidance as ECB President Lagarde said the ECB would keep rates "at sufficiently restrictive levels" as "inflation is still seen as too high for too long." Bund prices sold off into October and posted a 12-year low. The 10-year bund yield rose to a 12-year high of 3.03%.

European bond prices recovered into year-end as inflation pressures eased, with the Eurozone November CPI falling to a 2-1/2 year low of 2.4% yr/yr. That allowed the ECB to put its rate hike regime on a permanent hold at its October and December policy meetings.

UK - The ICE UK 10-year gilt government bond futures contract (Barchart.com symbol G) traded sideways to lower for most of 2023, but then rebounded in Q4 and finished the year up slightly by +2.75 points. Gilt prices posted their high for 2023 in early February after the Bank of England (BOE), at its February policy meeting, raised its benchmark rate by +50 basis points to 4.00%, but BOE Governor Bailey said he was "seeing the first signs that inflation has turned a corner." Gilt prices then ratcheted lower into August when the 10-year gilt yield climbed to a 15-year high of 4.752%. The BOE remained hawkish as it raised rates into August and lifted the benchmark rate to 5.25%. The BOE then paused its rate hike campaign at its September policy meeting and kept the benchmark rate at 5.25% for the rest of the year as the economy cooled and inflation slowed. UK Q3 GDP in Q3 grew at a pace of only +0.2% y/y, the slowest since the pandemic. In November, the headline UK CPI eased to +3.9% yr/yr, and core CPI eased to a 2-year low of 5.1% yr/yr. The slowdown in the economy and inflation fueled a rally in gilts in Q4 on expectations the BOE was done raising rates and would soon pivot toward easing monetary policy.

Canada - The Montreal Exchange's Canadian 10-year government note futures contract (Barchart.com symbol CG) in 2023 rebounded from a 16-year low in October and closed the year slightly higher by +1.63 points. The Bank of Canada (BOC) raised its benchmark rate for an eighth consecutive meeting in January 2023 to 4.50% but declared a potential end to rate hikes. The BOC maintained a steady policy until June, when it unexpectedly raised the benchmark rate by +25 bp to 4.75%, saying the Canadian economy remained "clearly in excess demand." The BOC raised rates again at the July meeting by another +25 basis points to 5.00% and then held rates steady for the remainder of the year as inflation subsided, with Canada's June CPI falling to a 3-year low of 2.8% yr/yr. After falling to a 16-year nearest-futures low of 112.59 (CGZ23) in October, Canadian bond prices recovered into year-end as the economy slowed. At its December meeting, the BOC said the economy "was no longer" in excess demand, signaling a definitive end to the BOC's string of rate hikes.

Japan - The SGX Japan 10-year Japanese government bond (JGB) futures contract (Barchart.com symbol JX) began 2023 on a weak note and fell to a 10-year nearest-futures low in January. Japanese bond prices retreated due to soaring inflation pressures after Japan's January CPI jumped to a 42-year high of +4.3% yr/yr. Japanese bond prices then recovered to the high for 2023 in March as the failure of SVB Financial sparked banking turmoil in the US and fueled a global bond rally that eased the pressure on the Bank of Japan (BOJ) to raise interest rates. Japanese bond prices then ratcheted lower into October based on expectations that the BOJ would end its negative interest rate policy. The BOJ began preparing the markets for a normalization of monetary policy when it raised the upper limit for its 10-year JGB bond yield target range to 1.0% from 0.5% at its July meeting. The 10-year Japanese government bond futures price in October sank to a 10-year low after the BOJ raised its inflation forecast and removed the 1.0% upper limit for its 10-year bond yield target range at its October policy meeting. That action pushed the 10-year JGB bond yield up to a 10-year high of 0.974% in November. However, Japanese bond prices recovered into year-end after Japan's Q3 real GDP fell -3.2% (yr/yr annualized), the largest decline in 3-1/2 years. 10-year Japanese bond prices finished 2023 slightly higher by +1.06 points at 146.53.

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