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If tomorrow’s jobs report is good, then watch for the dam to break in the Treasury market.That’s the call of Nomura’s George Goncalves:
In our minds Friday’s payroll report is likely to be the key event that will either validate the growing chorus of bond bears or send them into hibernation. Deep down, we believe it is a buyer’s strike rather than a large group of sellers that is driving the price action. However, if we are wrong and NFP is strong, it should dictate the next direction of yields, curve behaviour, spread movements and vol.
In a bear cycle, the areas of rate markets that are the most offsides would be curve steepeners and the upper-left corner of the vol surface, in our opinion. If an upcoming bear cycle is based on stronger economic data, we believe that intermediate curves would stop being market-directional as bear flatteners finally perform. Meanwhile, distant forwards are currently at near-term highs, which should slow down a sell-off out the curve. Lastly, the one market segment that is returning to its historical relationship with yields is swap spreads. A break higher in yields would indeed confirm the recent spread widening is an early warning signal for rates markets
A little more:
To be clear, before we exit our tactical bullish tilt we need to see Friday’s job number. The latest data have been robust and most signs point to a firming of economic conditions. But the build up to last month’s NFP report feels similar to what is happening this week (where data were solid and street economists were upping the ante on nonfarm payrolls into the release only to be disappointed). For now we hold our view constant as we still see the risks of the market being overly optimistic However, if we are proven wrong and the NFP data are strong we will acknowledge and re-assess our rates views.