Bond Market Week Ahead: Falling Rates Will Pause, Waiting For ECB And Jobs Data
The rally in U.S. Treasury bonds reached a crescendo last week, with 10-year yields falling as low as 2.42 percent before closing at 2.47 percent on Friday.
The data for the week continued to paint a picture of mixed economic growth going forward. On the uptick: durable goods, consumer confidence/sentiment, pending home sales, personal income and the Chicago PMI all showed improvement. Personal spending, Case-Shiller home price index and Q1 GDP all came in weaker than expected.
There was the release Monday of the ISM manufacturing report. Tuesday brings factory orders and auto sales, followed on Wednesday by the trade deficit and the Fed's beige book. The market will be focusing on the two major events at the end of the week.
Thursday, the ECB meets and is expected to announce further easing measures. The week ends with the payroll data on Friday. Employers are expected to have added 215,000 workers in May, according to a Reuter's poll.
Both the ECB decision and the jobs data may signal a pause in the rally of 10-year notes that have seen yields fall over 60bp since the start of the year.
Eurozone rates continued to decline last week. For the month, German, Spanish and Italian yields have each dropped over 15bp. The fixed-income markets have largely built in a scenario where the ECB takes more aggressive action to stimulate the economy.
Unless the central bank surprises the market with an unexpected and more far-reaching monetary policy easing, long-term rates in Europe may have bottomed for now. Any backup in eurozone yields next week may also cause a sell-off in the U.S. Treasury market.
The same is true of the May nonfarm payrolls due out on Friday. If the economy adds more than the 215,00 jobs expected, and last month's report is revised up beyond the 288,00 originally reported, the U.S. bond market should sell off. The strong rally last month was partially due to a large speculative short base in 10-year Treasury note futures.
The Commitment of Traders report for the week ending May 20 saw the net short position rise to its highest since before the financial crisis began. Last week, the gross short position was slashed by 131,00 contracts, the largest short covering in a week since December 2012. The gross short position returned to the levels of the late April period and will not provide a bid to the Treasury complex to offset an unexpectedly robust jobs report.
Owners of bonds and bond ETFs should be aware of the risks this week. The strong rally in ETF's may take a pause and come under pressure next week. A rise in eurozone rates and the lack of any substantial short covering by the street, will likely propel 10-year note rates above 2.55 percent.
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