G3 Recap 12-09-10

Main Items:

  • US Initial jobless claims declined to 421k last week vs 425k expected and 436k previously.
  • 30yr bond auction was very strong today, stopping over 5bps through the WI, a record.

Overseas:

  • BoE kept policy unchanged as expected.
  • Australian Employment jumped to 54.6k in Nov vs 20k expected and 30k previously. This took the UE rate down to 5.2% as expected vs 5.4% previously, as the Participation rate increased.
  • New Zealand left rates unchanged as expected.
  • South Korea kept rates unchanged as expected.

Commentary:

  • The recovery in treasuries prices today were all beyond the 5yr sector. The belly, in fact, closed half a bp cheaper on the day, despite the very strong 30yr auction. Finally, the 5yr inflation breakeven has only increased 7bps over the past week. In other words, the vast majority of the move has been driven by a rise in real yields, suggesting a market rerating of growth expectations in the aftermath of QE2. Looking at the market in this fashion suggests that the belly could cheapen further, as 5y real yields remain at just 7bps, which is itself 8bps below the low end of the range prevailing for most of the past 12 months.

    I don’t have a strong argument behind this view. I just think that most fixed income managers are trained to buy positive carry debt instruments – meaning that even TIPS need to have at least a modicum of positive yield to find sufficient sponsorship to have a stable trading range.

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One thought on “G3 Recap 12-09-10

  1. I tend to agree with your view. The value’s not there yet, the momentum in yields is pointed upwards and without some serious trigger meaningful speculative flows into long positions are unlikely. So, some more to go.

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