Yields did come down following the release of the December payroll report and while the loss of 85,000 jobs during December dashed hopes for a speedier recovery, it’s also failed to dent the underlying pessimism on the prospects for low interest rates for “an extended period.” This is the Fed’s favored expression as it sends its message that it will keep interest rates low while remaining vigilant to the challenges of rising price pressures. At some point this year the Fed will undoubtedly drop the expression from its minutes or regular statements as it becomes clear that the economy can withstand a normal interest rate setting. Evidence of that perspective is borne out by the fact that 10-year treasury note futures are struggling to breach earlier in the week highs when traders were more optimistic and seemed to find value in the yield curve.
Two hours after the data release the bond market is now sagging and yields are heading higher as curves steepen. Short end gains are hanging around while traders are watching longer dated maturities increase.
Eurodollar futures – have indeed staged a large turnaround from pre-data losses of around seven basis points to a gain on the day of about the same. The December contract earlier reached a yield peak of 1.39% before dropping in relief to stand at 1.24% for a 15 basis point intraday decline. A week ago yields were as high as 1.58% as money markets swallowed the bait in late December that the monetary sharks were on the prowl. The loss of jobs across manufacturing, wholesale trade and construction services has rejuvenated the view that hands at the Fed’s might be tied for a considerable period of time as if the November bright spot was merely an accident. However, as we wrap up today’s commentary, the yield on the 10-year note has come back to unchanged on the session at 3.83%.
Japanese futures – Yields on JGBs rose after the Finance Minister back tracked on what he really meant to say about a weaker yen yesterday. Today he feels that the market should be the arbiter of currency rates. Who knows what he has planned for fiscal policy? Such confusion isn’t a good recipe for confidence and in an otherwise hostile rate environment bond yields ticked up to their highest in some time at 1.35%.
European short futures – are marginally higher price wise allowing for a small drop in short end yields. March bunds put in a 121.84 high but have since fallen back to 121.37 and are down 11 ticks on the day. Yields are two basis point higher at 3.39%.
British interest rate futures – Gilts are back down after the euphoric response to U.S. data. March gilts yield 4.08%, four basis points higher than Thursday and have fallen 19 ticks to 113.90 after an intraday high at 114.38. Short sterling is indeed holding onto a four basis point gain on the session.
Australian rate futures –The Australian government bond added four basis points to yield 5.67% while bills are flat on the day.
Canada’s 90-day BA’s – Canadian markets were also disappointed with a reading of 2,600 job losses for December. The market was braced for a gain of 20,000. Bonds are higher yielding 3.63% as spreads widen versus the dollar.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers. ibanalyst@interactivebrokers.com
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