Dealers Take Payroll Data with a Pinch of Salt

Dealers sold treasury notes following the largest payroll gain by U.S. employers since May, 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.

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%.

Canadian bills – A healthy jobs report from Statistics Canada already had the credit market on its toes ahead of the release of its U.S. equivalent. Canadian bonds are lower with the June government bond future down by 29 ticks to 122.22 forcing the 10-year benchmark higher by four pips to yield 3.21% and consequently up through the U.S. 10-year yield. Canadian employers added 58,300 jobs in April with full-time employment surpassing its October 2008 level for the first time in today’s report. Consequently dealers are reluctant to keep pushing yields further down as employment prospects pick-up. Ninety-day bills fell by five basis points to imply a greater likelihood of a resumption of Bank of Canada tightening.

Japanese bonds – Japanese investors returned at the end of Golden Week celebrations to find the world around it falling apart -economically speaking. A collapse in commodities ushered in demand for the yen, which in turn dampened enthusiasm for Japanese stocks while deepening the desire to hold the safety of government bonds. The Nikkei Dow 225 index of stocks slid by 1.6% while the yield curve sagged to reflect increasing demand for safety plays. Five-year bond yields fell 3.5 basis points to 0.42% while the benchmark 10-year yield slid by six pips to 1.12% for its lowest reading since January. JGB traders bought futures for June delivery hand-over-fist leading to a contract gain of 72 ticks for a huge gain to 140.82.

Australian bills – The RBA updated its projections in Friday’s quarterly monetary policy survey raising the prospect of an interest rate increase later in the year. The central bank said that 2011 inflation would now increase by 3.25% instead of the 3% it forecast in February. The swaps market in turn stepped up its projection for tightening over the next 12 months and implies yields will increase by 38 basis points. Dealers holding short-dated bills were caught unaware by the report and had previously leant on a rising Aussie dollar and falling commodity prices to slim-down rate increase expectations. The Reserve Bank didn’t mince its words today when it said that a further tightening is likely to be required at some point for inflation to remain consistent with a 2-3% target over the medium-term.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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