U.S. Treasury Bonds Move Higher in Spite of Stronger Economic Data

By: Levente_Mady

The bond market traded mostly positive all week only to give up most of its weekly advance for second time in the past three Fridays.  Ironically, the worst fundamental news was released on Friday in the form of the monthly Employment report (see details in the economic data section below). 

It just goes to show you that markets move based on positions, not on fundamental data – especially in the short term.  As it has been happening with predictable regularity during recent months, regardless of the news - traders beat up the market heading into the long auction cycle scheduled for the second week of the month.  The fact that the Long Bond futures managed to stay even last week bodes well for the post auction market action.

The steady drum beat of financial institutions failing keeps rolling as another 3 financial institutions failed last week.  That takes the tally for 2009 to 87.

NOTEWORTHY:  The economic calendar was mixed again last week.  July Construction Spending declined by a below consensus 0.2% and June’s figure was revised down from 0.3 to 0.1 growth.  The ISM indexes sent mixed messages.  The Manufacturing Survey moved up four points to 53, which indicates expectations of growth for the first time in many moons.  On the other hand the ISM Services survey was only up two points and at 48.4 it is still below the 50 level that would forecast an expansion in this sector of the economy.  It is interesting to note that while the manufacturing sector is significantly smaller and in a secular shrinkage mode, the Manufacturing ISM seems to get more attention because it has a longer history and it is released 2 days earlier than the Service sector survey.  Bottom line is that both of the surveys have been improving for several months and they are very close to neutral territory.  One other item worthy of note is that the Prices Paid sub-index more than tripled to 65 on the manufacturing side and close to doubled to 63 on the services side.  Auto sales skyrocketed to above 14 million units on an annualized basis with a little help from the Cash-for-Clunkers government program.  Look for these sales to quickly fall back below 10 million now that the steroids are no longer administered.  Weekly Initial Jobless Claims decreased 4k from 574k to 570k last week.  In case you are wondering why it seems like Claims continue to drop but they are still stubbornly high, the answer is because the previous weeks continue to get revised up – that is not a good sign.  And then there was the much anticipated monthly

Employment report on Friday.  Non-farm Payrolls were -216k in August – very close to expectations, while the back months’ figures were revised down by a total of 49k.  The Headline Unemployment rate jumped to an almost 3 decade high of 9.7% - .2% above expectations.  I could spend another page or two on going into all the details while this report was actually way worse than it looked at first blush, but that is beyond the scope of this publication and there are oodles of excellent analysts out there that have done that already.  I will just mention that the more comprehensive Unemployment Rate that includes all the underemployed and discouraged workers that have given up looking for a job for now skyrocketed from 16.3 to 16.8%.  On average, more than 1 out of 6 people are presently unemployed in the USA and that trend is not moving in a happy direction.  In Canada, Employment rose 27k in August – which is apparently a surefire signal that the beginning of the recovery has arrived last month according to the experts.  I suppose it doesn’t matter that out of the 27k jobs added 30k were part time and full time employment actually declined 3k and that the official Unemployment rate rose to a new cycle high of 8.7%.  I continue to believe that Canada will face more severe economic challenges going forward than the US will.  This week’s data schedule will be light.

INFLUENCES:  Trader sentiment surveys became more bullish last week.  On a scale of 1-10, the surveys I follow are dead neutral at 5.  I expect sentiment to be somewhat supportive going forward as there is plenty of room to rise before this metric becomes overdone.  The Commitment of Traders reports showed that Commercial traders were net long 275k 10 year Treasury Note futures equivalents – a drop of 85k from last week.  This metric is rapidly losing its positive influence.  Seasonal influences are positive right through September.  The technical picture is neutral as bonds are probing the top of the recent trading range again.  A close above 121 on the Long bond future opens the door to test major resistance at 124.  The September contract traded up through 122 before falling back below 121 on Friday.  I expect that we should get some follow through to higher prices in the long bond during the weeks ahead.

RATES:  The US Long Bond future was essentially unchanged at 119-02 for the new December front contract, while the yield on the US 10-year note decreased 1 basis point to 3.44% last week.  The Canadian 10 year yield was also lower, falling by the same margin to 3.38%.  The Canada-US 10 year spread was unchanged at 6.  The US yield curve was flatter as the difference between the 2 year and 10 year Treasury yield increased 7 basis points to 250. 

BOTTOM LINE:  Bond yields were pretty much unchanged last week, while the yield curve became slightly steeper.  The fundamental backdrop remains weak, which is supportive for bonds.  Trader sentiment is moving up to neutral – which is somewhat positive; Commitment of Traders positions are neutral and seasonal influences are bullish.  I recommend keeping the long bonds that were purchased back in June.

By Levente Mady
lmady@mfglobal.com
www.mfglobal.ca

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