Bond investors turned bearish despite a miss on the headline U.S. number as they looked beyond the blizzards to realize that jobs growth remains very much alive. A coincident report from Canada earlier in the morning also showed that employment growth was much stronger than was expected. The big take away is that the economy continues to roll forward and that was confirmed by rising yields and falling bond prices beyond the data.
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Eurodollar futures – The headline gain of 36,000 new jobs was well adrift of expectations of 146,000 additional jobs. The Labor Department reported that more than 800,000 workers were prevented from working. New private hiring at just 10,000 was short of a projected 50,000 but factory payrolls jumped five-times forecast at 49,000. Despite immediate confusion surrounding the aberration caused by hazardous weather, investors dumped bonds sending the 10-year yield to 3.58% – its highest since June. The 30-year bond rose to 4.67% for a 10-month high. March 10-year Treasury note futures stopped sliding at 118-23 before recovering to 119-03. Meanwhile the shorter end of the market saw implied yields add 10 basis points in yield before lenders emerged. Eurodollar futures contracts currently face losses of six basis points on the session as expectations for an eventual change in monetary policy play out.
European bond markets – European bonds also softened in response to the U.S. data with German yields also stiffening ahead of ministerial meetings in Brussels. Earlier this week, German two-year yields rose by 14 basis points to reach the highest since August 2009, while 10-year yields added to recent losses for bond prices escalating to a one-year high. Chancellor Merkel is hoping to secure stiffer sanctions against partner governments who fail to restrain budget deficits to pre-agreed 3% limits as a proportion of GDP. Any accord on dealing with sovereign debt issues over the weekend is likely to further soften the appeal of government bonds as a safe harbor. Euribor prices bled some of yesterday’s gains with most contracts along the strip lower by two basis points. German 10-year bund futures trade with continued losses at 123.04 but at a mid-range price having recovered from knee-jerk losses after today’s report.
British gilts – A Halifax house prices report showed a surprise rise for home values during January and only reinforced dealers’ fears that the bank of England might need to reverse course on monetary policy later this year. Short sterling futures saw increasing losses at further out maturities with the December 2011 losing two pips while the December 2012 future shed seven basis points creating a five pip widening in the one-year calendar spread. Like German credit markets the March gilt futures is treading water at a mid-range price of 116.22 to yield 3.79%.
Canadian bills –Canadian yields edged higher by three basis points matching a rise in the U.S. treasury curve. On account of a more decisive gain for domestic employment, where employers added 69,200 additional jobs during January, bill futures have fallen harder than Eurodollar futures in anticipation of increased prospects of an interest rate increase later this year from the Bank of Canada.
Japanese bonds – Notwithstanding a rising yen, corporate Japan faces rising earnings this year and next according to glowing reports from analysts, proving that the Bank of Japan’s bond purchase program is working. Demand for government debt appears to be easing judging by the fact that yields are once again approaching 1.30% for the second time this year. A break above here would mark the highest in eight months. Overnight strength for the Nikkei 225 stock index of more than 1% helped deliver losses of 23 ticks to the March JGB future, which closed at 139.08 to yield 1.28%.
Australian bills – Bill prices down under took a pasting after the Reserve Bank upped its growth and inflation forecast to accommodate rising coal output and efforts to rebuild the tattered state of Queensland following recent floods. The 10-year government bond yield surged by eight basis points to 5.70% while the short end also recoiled to reflect the possibility that the central bank would raise short rates by 38 basis points during the next 12 months for an eight pip escalation in that consensus overnight. Bill prices dropped by increasing amounts along the curve forcing a steepening of 15 basis points in the March 2011/March 2012 calendar spread.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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