So there you have it. An early 8-point lead for U.S. stocks turned to dust following the U.S. employment surprise as investors figured the odds were now against them in terms of chasing fresh record highs. The biggest beneficiary from the report showing a mere 74,000 rise in payrolls is the fixed income market. The 10-year yield is lower by 8 basis points (bps) to 2.88% and sits rather comfortably below the threatening 3.00% watershed. We suggested in a bulletin earlier this week that the yield curve had caught a cold as traders’ expectations over a faster Fed exit from its easy monetary stance were giving the Eurodollar strip uncontrollable shivers!
Chart – December 2014/2015 Eurodollar Calendar Spread Breathes Easier
The earlier-in-the-week rise toward 3.00% for benchmark Treasury note yield was accompanied by a dramatic shift in shorter-dated interest rate expectations across the next four years according to Chicago-traded Eurodollar rate futures. The softer data Friday has not only found buying from the two-year through 10-year maturity spectrum but also encouraged fixed income traders to fret less about a faster Fed wind-down.
Two-year yields fell 4.7bps to 0.382% while the five-year note lost 9.7bps to yield 1.651%. The longer-dated 30-year bond shed5.8bps to trade with a yield of 3.821%.
Across the Eurodollar strip there was only a mild bid given the limited earlier reaction with implieds losing up to 5bps. But in the 2015 strip, implied yields dipped by 8bps while the juicier action was seen in the 2016 strip where Eurodollar futures surged by 15bps. The curve has once again reversed its steepening process as the market figures that the December jobs disappointment trumps other recent firmer economic data and will not hasten the Fed’s withdrawal process any faster than it already is.