Recap 7-05-13: Developed Markets 2 Year Yields Still Too High


US treasury curve bear steepened sharply following payrolls. Even though the unemployment rate didn’t change, the uptick in the participation rate offset that, while the strong +70k revision to the payrolls figure was also a positive. In response, some of the more dovish brokerage houses changed their forecast of the tapering date to Sept from Dec. Although the US yield curve could well steepen further, after today’s move, the front end is again mispriced. The chart below shows the current market pricing vs the June FOMC forecasts. If front ends yields do not retrace, expect the Ben Bernak to do some jawboning next Wed.

Separately, yesterday’s BoE and ECB meetings have been covered ad nausem elsewhere, but I just wanted to say a few things. First, despite the ambiguity, it is probably safe to say that both central banks believe that the 2y swap yields in their currencies are too high. The ECB commitment was not definitive, but was nevertheless unprecedented and backed by a unanimous vote. Furthermore, Draghi defined ‘extended period of time’ as longer than 12 months. As a result, Euribor contracts continue to look attractive, even after the price action yesterday. A similar argument could be made for Short Sterling contracts.


  • US Payrolls rose 195k vs 165k exp. Revisions added 70k. Unemployment was stable at 7.6% vs 7.5% exp, as the participation rate ticked 0.1% higher to 63.5%. Hourly Earnings growth was also strong, up 0.4% MoM vs 0.2% exp.
  • Canada Employment declined -0.4k vs -7.5k exp. This kept the Unemployment rate stable at 7.1% as exp on the back of an unchanged participation rate.

Upcoming Data:

  • Mon: Japan Current Account, Eco Watchers Survey, Canada Building Permits, BoC Loan Officer Survey, NAB Business Conditions, China CPI
  • Tue: Canada Housing Starts
  • Wed: FOMC minutes, Bernanke speaks, Australia Employment
  • Thu: BoJ, US Jobless Claims
  • Fri: UMichigan Confidence