Such has been this week’s market turmoil escalating fears over economic slow down and fanning talk about a double-dip recession, bond yields have already fallen to such levels that makes it hard to justify moving lower without severely weaker data. Friday’s June employment report carried a 9.5% headline rate of unemployment and failed to materially strengthen the case that the economy is moderating to a point worse than Federal Reserve members have already predicted. As such the dip in bond prices following the report offered a suggestion of surrender for the recent rally in yields.

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Eurodollar futures – Such has been the abundance of what many believe to be bad economic news this week, ranging from declining consumer confidence and weaker factory output around the world, today’s reported 125,000 drop in jobs during June hurt the rush to lower yields. Investors can’t respond in an overly negative fashion from the more than expected loss of 125,000 jobs given the 83,000 increase in private sector jobs for the month while also poring over upward revisions to the previous couple of months. Fears that lower growth will curtail consumption in the second half of the year are always subject to the surprising vigor that consumers have showed during the recovery even when the rate of unemployment was running at a double-digit pace.

Also lost in today’s overall job loss was a deeper sense of the performance of the labor market. The net decline was largely caused by the end to 225,000 temporary positions created to conduct this year’s census. What next for these people and will they remain part of the labor pool? Manufacturing jobs continued to gain although at a slower pace than was predicted as 9,000 new hires were made, confirming the recent PMI data indicating a slowing in the pace of expansion. Of concern, however, is the loss of 117,000 service positions after a 420,000 rise. Confirming the less than wonderful health of the building trade, construction companies shed 22,000 positions in June.

Equity prices made a positive response after digesting the data, while the dollar remains weak. Treasury traders appeared to book profits and concluded that there was nothing so worrying about today’s report that justified pushing yields lower. The 10-year note future expiring in September dipped 10 ticks to yield 2.94% as Wall Street opened for business, while Eurodollar traders also appeared to bank easy gains from falling yields this week.

European bond markets – European bonds came to a calmer finish this week with peripheral bond yields narrowing relative to those of Germany. September bund prices are now trawling the lows of the session at 129.14 and continue to decline. The health of the financial sector is ever so slightly under less scrutiny after weeks of torment. Hard economic data showed producer prices in the Eurozone rose 3.1% year-on-year during May, while the unemployment rate slipped to 10% although remaining near the cycle high.

British gilt – The softer tone to bonds has gilt prices on the decline with the 10-year yield jumping by three basis points to 3.34%. That despite positive commentary on the fiscal health of government finances from Moody’s rating agency.

Japanese bonds – The recent rally in the yen has the potential to harm export profits but a more positive tone for risk appetite overnight helped relieve some of the strain on the yen, which in turn forced bond yields to increase by three pips to 1.083%.  

Canadian bills – Bills rose ahead of the U.S. jobs report as investors continued to rely on gains in Eurodollars to erode confidence in the view that the Bank of Canada would push rates higher. Later, however, dealers had a rethink and pushed implied shorter-dated yields up by eight basis points. Bond prices were under light pressure with the 10-year government bond adding one basis point to stand at a yield of 3.07% maintaining a 13 basis point yield premium over U.S. notes.

Australian bills – Aussie 10-year yields rose a notch to 5.08% despite rising risk appetite overnight. Bill prices were lower sending yields a couple of basis points higher.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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Andrew Wilkinson

Director of Media Communications

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Andrew Wilkinson

Tags: Andrew Wilkinson, Bonds

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