July 8. NFP sparks bond panic

–Carnage in back end of the curve as the employment report was slightly stronger than expected with NFP +195k.  Ten year yield rose nearly 1/4% to 2.71.  Red/gold pack spread jumped 27 bps to just under 287.  Green/blue pack spread was up 11 to 109; colleague Art Main notes it’s the highest level of this spread ever (since 1989 which is probably when blues were introduced).
–I’ve read that the Fed considers the 1994 tightening cycle as a mistake which led to the blow up of Orange County and indirectly fed into the Mexican Peso crisis.  The Fed fund target started 1994 at the then rock bottom rate of 3%, and in a series of hikes beginning in February, ultimately rose to 6% in February 1995.  The bond yield went from 6.3 in Jan to 8.0 in December, a percentage yield increase of 25%.
–Though the absolute level of the ten year yield is still low by historical standards, it has nearly doubled in a year, from around 1.50% in July 2012 to 2.71 now.  On a percentage basis this has been a monster move, and while it causes some to get off the fence and lock in rate protection, it’s also likely to have a negative influence on growth which the Fed will consider at the FOMC at month’s end (July 31).
–Supply this week, 3’s 10’s and 30 year bonds beginning tomorrow.  Auctions may continue dampening enthusiasm on treasuries for the short term, but a five year yield of 1.59 represents juicy carry compared to recent history.  On the other hand the last gold, June’18 contract, settled Friday near 4% (96.005).  Gold pack (5th year) was down a whopping 35 bps Friday.

Posted on July 8, 2013 at 5:39 am by alexmanzara · Permalink
In: Eurodollar Options

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