It appears that the bond market was either positioned for a stronger employment report or is relieved that the recovery did not get too hot. Perhaps it’s the former as bond traders seem overly concerned on the timing of the first increase in short-term interest rates at the Fed. The recovery remains gradual, the labor market added more jobs over the winter than expected ahead of Friday’s report, yet inflation continues to play dead and is absent from just about any scenario about which we’ve read. Wage growth remains subdued. As a result treasury prices nudged ahead following the report leading to a flattening of the curve. The yield on the 10-year benchmark shed 4bps to 2.75% and fell almost 7bps at the ultra-sensitive 5y horizon to 1.73%. Even the 2y yield eased by 3bps to 0.42% in the post-payroll relief rally.
Eurodollar futures traded in Chicago also recovered ground sending implied yields on 3m-cash down by around 8bps at maturities beyond December 2015. Those larger yield declines at farther maturities allowed the yield curve to flatten post data. The chart below plots the gradient of the curve between the end of this year and the end of next year using Eurodollar futures. At the onset of tapering in December the curve was sloped positively by around 55bps before ramping up to 80bps. Having digested the FOMC’s game plan and reacted to weaker economic data, the curve later settled back to a gradient of around 60bps. Ms. Yellen’s disclosure at her first press conference that short rates might rise as soon as six-months following the end of tapering created the latest bout of curve steepening sending the spread skyrocketing towards 90bps. As the bond market improves in tone following the release of the latest employment report, there appears to be further amelioration in the market’s nascent fear over the onset of actual monetary tightening. The Dec14/15 Eurodollar curve is currently priced at 82bps.
Chart – Eurodollar futures rally, yield curve resumes flattening process
(click to enlarge)