Yields in flux as investors position ahead of labor data

Some wing-clipping is taking place on Thursday as sellers drive government bond prices back down. Doves had flocked out of the cage midweek following a weak measure of the labor market dragging yields down by 12 basis points to cross the 3% threshold for only the first time since December 7. To put such a flight to quality in to perspective, the last such move followed the Japanese earthquake. Ahead of Friday’s government data some profit-taking has set in with investors concerned that sub-3% yields, already negative in inflation-adjusted terms, will stifle demand.

Eurodollar futures – September notes stretched to 123-17 toward Wednesday’s close spurred on by comments from Fed Vice Chairman Yellen who told a Tokyo audience that ultra-low monetary policy befitted an economy grappling with elevated unemployment. Market rumors of a central bank buyer have kept a lid on rising yields on Thursday and after initial claims slipped to a nevertheless disappointing 417,000 reading. In light of the weak ADP reading several economists have revised down their predictions ahead of Friday’s non-farm payroll reading and despite earlier selling notes are leaving behind the session low at 123-03. The yield on the benchmark note of 2.99% is five basis points higher than at Wednesday’s close. Eurodollar futures have traded in and out of the red so far and are inversely tracking the fortunes of the stock market, which is defying pre-market indications of a rebound from a midweek slide.

European bond markets – Mixed fortunes for Euroland bonds on Thursday. A Moody’s downgrade for Greece sent a shockwave across the region and drove yields on core paper lower at the outset of trading. The potential for a sovereign default now stands at 50% according to the agency. However, speeches by German Chancellor Merkel and ECB Chief Trichet appeared to rally the European community and provided a sense that leadership was preaching from the same gospel. An earlier rally in risk was prompted by the revival of fortunes for the euro, which traded at a three-week high and knocked some stuffing out of German bunds as investors felt less in need of safer assets. June bunds gave up on a session peak at 125.98 falling to a session low at 125.52 before steadying. Yields rose to match the 2.99% of U.S. treasuries. Short-end euribor futures are relatively unchanged.

Canadian bills – Shorter-dated bill prices staged a decent rally to 98.53 in the December contract in earlier morning trade but the rally fizzled and contracts are mainly down by a tick on the day. The decline in the implied yield curve means that the futures market have fully retraced the bearish response to the Bank of Canada’s recent statement on Tuesday that they’d be moving to further restrict policy at some unspecified point in the future. September government bond futures slipped by 19 ticks to 124.88 yielding 3%.

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