It’s not easy figuring out which driver has the most impact on the bond market these days. Bonds with maturities from two-to-thirty years advanced following a raft of mixed economic data Thursday, while Eurodollar futures expiring in 2016(CME:EDH16) advanced most across the three-month cash complex. The advance for bond prices shifted yields lower across the board with 10-year notes(CBOT:TYU14)yielding the least since June 2nd at 2.52% while 30-year bonds(CBOT:USU14) eased to 3.34%, also the lowest since the start of June.
The latest and most granular employment data showed slow, steady improvement in the labor market as initial claims remained near pre-recession lows. Fixed income investors were undeterred by the fact that the Fed’s favored measure of inflation, the PCE index rose closer towards the Fed’s 2% ceiling. Meanwhile personal income and spending data revealed mediocre consumption habits even as average payroll gains so far this year reveal the strongest pace in 15 years.
A weakening yield complex is also eroding the value of the dollar across the board, with investors showing little appetite to weaken even the euro, where the ECB recently adopted a negative deposit rate. The pound is also advancing against the dollar despite further confusion this week over the potential onset of interest rate increase in the UK. And then there is the issue of the stock market, where prices are falling Thursday but remain tightly-coiled. As ever, investors appear to be treating the potential for any equity setback with kid gloves. One or two earnings reports may have disappointed lately, yet there are no signs of recession on the horizon and the economic data continues to offer little challenge to the Fed’s current stance. As such, investors appear to be taking the bond bull by the horns once more.
Chart – Eurodollar futures matching bond yield