Bond dealers take payroll with a pinch of salt

Dealers sold treasury notes following the largest payroll gain by U.S. employers since May 2010, and the biggest private-sector gain since February 2006. Yields rose, but hardly enough to justify the headline number. Investors were either skeptical of the data or perhaps simply less willing to sell bonds at the end of a week in which rising risk aversion was given an official seal of approval by a hammering for commodity prices.

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Eurodollar futures – Eurodollar futures buckled at the site of a headline 244,000 payroll gains for April causing the strip to slip by four basis points. But sellers stopped trying to drive contracts lower as the market digests whether the April report is likely to materially change the recent dovish-take on the labor market’s performance from Fed Chief Bernanke and others who reportedly expressed disappointment in the pace of recovery for jobs. The resounding answer seems to be that it won’t. Earlier in the week investors bid bonds higher lowering yields in response to anecdotal evidence that both economic wings of manufacturing and more importantly services were showing signs of strain. Ten-year yields have backed-up to 3.20% this morning, yet remain remarkably depressed in response to recent news not least the popping of the commodity bubble this week. Crude prices dropped by the most in 26-years while silver prices fell by more than 30%. This appears to neatly vindicate the lower yields that bond buyers are forced to accept.

European bond markets –Questions surrounding the response to ECB tactics and protocol surrounded the aftermath of Thursday’s press conference. Euro bulls had insisted in hearing the word “vigilant” from ECB Chief Trichet in order to feel reassured that the euro’s ascent was deserving of its expected yield differential widening. Mr. Trichet swallowed the altogether wrong dictionary over lunch and spewed out lots of mumbo-jumbo about being in agreement with the American authorities over a stronger dollar. Dealers sold the euro for all their worth as they concluded that the recent surge in the exchange rate was suddenly a factor in ECB policy-makers arsenal, which of course it isn’t. Euribor futures surged as implied yields slid and the three-month Libor eased today for the first time since mid-March to 1.42% consistent with a futures price of 98.58. That compares to the current June future trading at 98.48 (1.52%) and a September future implying a three-month yield of 1.80%. In an earlier report German industrial production jumped more than forecast in March when it rose 0.7% on the month leaving it 11.2% higher year-on-year. The 10-year German yield eased by four basis points to 3.17% crossing back above comparable U.S. yields.

British gilts – Unchanged short-sterling futures prices don’t reflect a range spanning up-and-down moves for the yield curve today. The worse-than-forecast reading for producer prices inevitably left its scare on the complex although prices look set to end the week flat at the end of a week when sliding commodity prices will help central bankers around the world dull their forecasts for inflation. June gilts rose 13 ticks to 120.31 to yield 3.40% with prices extending a fourth weekly gain. Two year yields slumped by 16 basis points for the week to 1.04%.

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