Initial Claims Versus the Philly Fed Keeps Bond Traders Hopping

Never let it be said that there is no fun in trading bonds. Hot on the heels of yielding the least so far in 2011, the U.S. benchmark 10-year note slumped Thursday to the most all week in response to a firmer tone to weekly jobless claims data. Dealers responded to a dip of 29,000 in the first time claims data and sold notes. But after a later slump in the Philly Fed manufacturing index, like a cat on a hot tin roof, investors jumped back into fixed income suspicious that recovery is all that it seems.

Eurodollar futures – The focus within the April FOMC minutes shifted to the first real debate on an exit strategy yet divisions within the panel of monetary economists means that central bankers are satisfied at this stage with rearranging the furniture well in advance of any retirement party. However, the mere fact that exit strategy is now up for discussion has reminded investors that the recovery is in process and that the Fed intends to slip into the background at some point requiring significant reduction in its balance sheet upon which the recovery remains reliant. A fall towards 400,000 for initial claims prodded long-bond positions to grow concerned that perhaps the labor data is set to improve more to where the Fed wants it. However, the Philly Fed’s manufacturing activity gauge slumped according to the May reading. Dealers were expecting a gain from April’s reading of 18.5 but in the event the number came in at 18.5. Since then June notes have rallied from 121-30 to 122-10 where the yield stands at 3.20%.

European bond markets – Continental bonds were slave to the rhythm of the American credit markets. German bunds have recovered from earlier losses to 123.73 adding two pips to the 10-year yield, which stands at 3.13%. An earlier FT Deutschland article claimed ECB Chief Trichet said the central bank would combat any political move to restructure Greek debt by refusing to accept such paper as collateral. This is a handy club for the ECB to wield given the negative implications for already difficult circumstances facing Greek banks in the European money market. Implied short-term yields ticked up a notch with Euribor futures slipping by a pip.

British gilts – The British yield curve is largely unchanged despite a more robust retail sales report for April where sales rose above expectations at a 1.2% pace between months. Gilt yields added two basis points not necessarily as a direct result of today’s report, but most likely due to the overall heavy tone to fixed income after yields slumped this week. The June gilt future slumped to 120.11 as the yield rose to 3.40% ahead of a recovery to 120.45. A monthly CBI report showed retailers less pessimistic in May than last month with the headline balance improving from -11 to -2. Fewer retailers expected to raise selling prices depicting a harsh environment as government spending and employment cuts bite.

Canadian bills – Dealers raised the implied yields on bills of acceptance futures by a tick or two ahead of Friday’s eagerly anticipated retail sales and inflation data. The recent slide in commodities has redefined the horizon on inflation across the globe and expectations for further monetary tightening from the Bank of Canada have been sharply reduced in the last several weeks. Before the market moves to further narrow over the U.S. yield curve where an onset of tightening remains difficult to pin down, dealers need to see further evidence of a tepid retail demand and inflation backing away from the top of the Bank’s target range. Ten-year government bond futures are well off the session low but remain lower by 21 ticks at 124.10 to yield 3.22% and as such remain higher yielding than treasury notes.

Japanese bonds – Japan’s third recession in a decade was confirmed with a second quarterly contraction. Both fourth quarter and the latest first quarter data confirmed what Bank of Japan Governor Shirakawa phrased this week as a “desperate state” for the domestic economy. The latest 3.7% slump followed a downward revision to a 3% contraction through December 2010 and reinforced the maintenance of the central bank’s provision of ample monetary stimulus. Bond traders figure that supply will therefore remain higher than ever and turned their noses up at today’s five-year auction. Yields rose across the curve with the 10-year bond trading at 1.145%.

Australian bills – A firmer Aussie dollar in the Asian session and buoyant equity markets helped by affirmation that the timing of the Federal Reserve’s reversal of policy stimulus remains best measures in quarters rather than months, soured domestic credit markets. Although the benchmark government bond yield was unchanged at 5.33% the implied yields on shorter dated three-month money jumped by four basis points. A February weekly wages report indicating wage growth remains of little concern to the central bank’s attempts to control inflation was outweighed by the implications of ongoing stimulative monetary conditions around the globe.

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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