For the second straight Friday, it sure seems like no one wants to be holding Treasuries headed into the weekend.
Last Friday, Treasuries went more or less straight down throughout the day. Today, after a brief spike during the deluge of new economic data released this morning, bonds have turned in a repeat performance of last week’s Friday session.
The chart below shows the last two weeks of trading in 30-year U.S. Treasury bond futures, with the Friday sessions circled:
The market is on edge right now. For the first time in a long time, traders find themselves all asking the same question: Can yields go higher?
(Yields, of course, are inversely related to bond prices, so a backup in yields causes those holding bonds to take losses on their principal investments, which is why the market is on edge.)
The best explanation we’ve heard for this phenomenon is from Russ Certo, who heads the rates department over at Brean Capital.
In a note reflecting on last Friday’s performance, Certo wrote:
I haven’t seen too many days in the bond market recently like Friday, where the market was continuously under pressure, with seemingly paper coming out of the woodwork on any mere flirt of an uptick.
In the world of ZIRP (Zero Interest Rate Policy), pegged rates, Fed owning float, and QE marginalized markets, many players on usual Fridays simply call in, lightly indulge in pizza breakfast, and maybe look to cheat an early break for the weekend with uneventful markets.
Artificial markets. Same old pattern with little fundamental inputs to create volatility. Off to some shrimp on the barbie.
“Not so, now.” wrote Certo. “I anticipate 2013 will be far more exciting than 2012 and in some ways, already has.”
Today was another one of those exciting days. We had a ton of economic data out this morning – all important in today’s bond market, given concerns that growth could really take off and cause interest rates to rise accordingly.
Sure enough, we had a weaker than expected nonfarm payroll print this morning, but it was accompanied by sizable, positive upward revisions to last year’s data, suggesting the labour market is actually on better footing than previous estimates suggested.
We also had an unexpected rise in consumer confidence, better than expected growth in construction spending, and a surprise leap in U.S. PMI and ISM manufacturing indices – all arguably negative for bonds.
It’s pretty clear that there’s been a sea change in January, and bond traders could be living in a very different world in 2013 if these sorts of trends continue on into the year.
This is what the new Friday looks like.