Treasuries rally on positive jobs news

The yield on the 10-year U.S. government note made a beeline for 3% on Thursday following a surprising initial unemployment claims reading in which insurance applications fell by 21,000 to 454,000. The data comes on the heels of last week’s monthly employment picture, muddied by census hires and fires, which disappointed many onlookers. Today’s subtle jobs report helps scotch recent arguments that the economy is once again heading for the rocks.

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Eurodollar futures – It seems that Wednesday’s huge equity market rally, which was a real bolt-out-of-the-blue, openly confirms what many investors sense despite what most analysts say. Fears that the global recovery is fast-moving towards a second wave of recession are well over cooked.

An IMF quarterly economic review used faster first half growth to bolster its full-year expectations for global growth. Meanwhile its 2011 projection of 4.3% GDP growth remains marks only a minor slowing in the pace of global activity, while remaining a long way from recession. On the back of today’s IMF report there is a sense today that investors are breathing a huge sigh of relief and one that denies a second-wave of contraction was ever a realistic possibility.

In a Bloomberg radio interview on Wednesday, Kansas Fed chief Thomas Hoenig maintained his line of dissent arguing that monetary policy should indeed be raised. His rather logical premise denied an understanding of what creates bubbles, but clearly illustrates recognition of the necessary ingredients. Meanwhile, Dallas Fed President Richard Fisher also dented perma-bears’ expectations of a double-dip in a speech yesterday.

September notes are extending losses after initial claims data along with a not-too-hot and not-too-cold reading of reports from retailers for June with the September contract now off a half point to 121-30 where the yield reads 3.03%. Eurodollar futures fared minor losses.

European bond markets – The ECB left policy settings unchanged today and once again referred to the current rate environment as “appropriate.” The IMF report inferred that the ECB may need to revert to reliance upon further quantitative easing should a tightening fiscal stance constrain growth efforts. German bunds have reversed early gains and now face a 45 tick loss to 128.78. The 10-year yield added four basis points to 2.64%. Euribor futures responded to an ever-tightening cash situation in the money markets where liquidity remains scarce. Futures fell around six basis points.

British gilt – A downturn in U.K. house prices during June may dent optimism over the economic recovery especially in the face of a restrictive fiscal stance, yet gilt futures also tumbled today faring a 30 tick loss to stand at 120.70 in the September futures contract. Meanwhile short sterling futures pulled back from recent gains with the curve rising in yield terms by around three basis points. The Bank of England made no noise on interest rates today as its meeting concluded with no change.

Japanese bonds – The Japanese yield curve softened a little although at the 10-year benchmark yields were unchanged at 1.129%. Weakness in machinery orders for June, which fell at the fastest pace in five years, kept dealers cautious about the recovery while the Nikkei rebounded thanks to follow-through buying on a midweek rally for U.S. equity prices, while firm labor market data in Australia.

Australian bills – Aussie government bond prices slumped causing a seismic nine basis point shift upwards in the 10-year yield following the June employment report. Yields jumped to 5.11% following a 45,900 increase in payrolls and almost three-times the market forecast. Not only does the reading confirm the health of the domestic economy, but it also underscores the words from the IMF today where Chinese, Indian and Brazilian expansions were carrying the world economy forwards. Aussie bills only shed around four basis points as dealers continue to ponder the prospect of any further RBA tightening.

Canadian bills – Friday will bring the Canadian employment report and given the country’s economic exposure to commodity-hungry nations, investors are primed for another big number. Government bonds and 90-day bills are facing the heaviest losses today after the U.S. initial claims data was rosier than forecast. The September bond future trades 85 ticks easier at 122.58 and at the lower end of a weekly range, while bills are off by around 12 basis points.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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