Bond market gains underpinned by dovish Bernanke

The highly-anticipated employment report is having relatively little impact on the market at the end of a volatile week. New Year optimism was boosted by ever-strengthening domestic economic data and crowned by December’s ADP report read by many as a precursor to a boon for a nationwide hiring spree in government data. In the event, the report fell short leaving investors wondering whether some of that earlier optimism might be misplaced. Fed Chairman Bernake, in his testimony to lawmakers, further dampened Friday’s employment report by saying that the recovery remained modest and spelled out the length of time it would take to recover jobs lost over the last two years.

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Eurodollar futures – Earlier in the week losses for bonds sending yields back towards 3.50% have been tempered as a result. March note futures jumped on the release of news of 103,000 additional jobs during the month and short of the private-payroll assessment of 297,000 jobs. The contract is up by less than a half-point at 120-06 to yield 3.39% and remains short of a Wednesday peak ahead of the ADP number at 120-23. Eurodollars also made gains as Fed Chairman Ben Bernanke described the employment recovery as “modest.” The deferred strip stands around 10 pips higher as implied yields decline as investors draw in their horns returning to a script of modest growth.

European bond markets – In continental trading sovereign debt fears fuelled further widening of the spread between core German government paper and peripheral government bonds. The 10-year yield on Portuguese debt rose a further 18 basis points for example at the same time as German bunds added a couple of basis points. Since the U.S. employment report, March German bund futures have popped into positive territory to trade at 125.82.

British gilts – Short sterling futures continue to trade lower sending implied yields just marginally higher. There was, however, no data to support the drift towards higher rates today with an 18% year-on-year dip in new car registrations through the end of 2010 the only catalyst on Friday. Gilt yields rose by three basis points while the March gilts are trading at an unchanged 118.33.

Japanese bonds – March JGB futures ended the session higher within a narrow trading range and added 10 ticks to 139.75. The 10-year government bond yield slipped a smidgeon to 1.19%.

Australian bills – Aussie credit traded quietly with all eyes on unfolding events in Queensland. It’s hard to estimate the loss to output at this stage nor how long it will be before mines are able to produce again. Yields eased by a basis point at the 10-year horizon to 5.59%.

Canadian bills – Despite a strong employment report, government bond futures have taken a bigger cue from U.S. credit markets with the March bond future adding 21 ticks to 121.47. The yield remains unchanged at 3.23% while BA contracts saw far smaller gains of one or two pips following a strong rise in full-time employment during December. The Canadian economy added a net 22,000 employees on the month with 38,000 new full-time jobs outweighed by a decline in part-time employment.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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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