Sept 10. Employment weaker than expected, but bonds close lower
–Unemployment report was a disappointment, with NFP up only 96k. Interest rate futures immediately erased morning losses and rallied to the highs, though not quite through contract highs made on Tuesday. However, the rally ran out of steam, especially at the long end, and by the end of the day the bond contract actually closed lower. Ten year yield fell only 1 bp to 1.66 while 30 yr was up 2 bps to 2.82. Red/gold pack spread fell 3.25 bps to 121.25 with golds +6, but eurodollar contracts beyond Dec’18 all closed lower.
–Gold (+35) and silver (+106) continued strong rallies as the prospect of QE was made clearer by the weak data, with prices further underpinned by european monetization. Since August GCZ has rallied from around 1600 to 1740, a run of nearly 9%. Silver was around 28 in Auguust, now up to 33.70, 20% jump in a month.
–The Fed is already absorbing the majority of longer dated treasury issuance, and will likely buy MBS. Credit standards have increased for mortgages, making MBS paper safer. Better credits have already refinanced or are able to buy homes. Since the gov’t owns the agencies anyways, wouldn’t it be much more stimulative to allow handcuffed homeowners to refinance at low rates?
–The ECB is going to target paper under three years. Chinese President Hu Jintao admitted that slowing exports are pressuring the economy and is pledging more fiscal stimulus. The Fed is the only one targeting longer rates, and the market appears ready to test whether that plan continues to lead to a flatter curve.
