Reading The Bond Market Price Action Post-NFP
In order to make sense of the price action COMING OUT OF the number, we first need to know what positioning was GOING INTO the number. Yesterday, the bond market rallied all the way into the 2pm 7yr POMO (a little unusual). Since the day before NFP is usually a "position squaring day," we can assume this means that marginal shorts were covering those shorts. So, with that in mind, the trading portion of the bond market (on the margin) went into this number FLAT or LONG. So, with positioning out of the way, we turn to relative value. As discussed Wednesday, UST yields were (and still are though not as much) rich vs stocks (10yr yields reached 14.6 bps rich yesterday). With NFP out of the way, the next major risk events are the 10yr and 30yr auctions next week (there is a 30yr and TIPS POMO Monday and Tuesday, but they should not have a significant impact).
So, what is the conclusion? On some days where NFP reprices the market, traders often "fade the move." I do not think today should be one of those days. I firmly believe that UST will continue to cheapen vs stocks as we approach the 10yr auction over the next few days. I don't think I want to take that position into the auction itself...i'd rather cover before that. However, we have 3.5 trading days to the 10yr auction, and in that time i expect some auction setup selling to take place (a resetting of those shorts that were covered yesterday). On the margin, I expect the 10yr to continue to cheapen from these very rich levels. With approx 9bps of cheapening left, i think expecting at least half of that amount (4-5 bps) is still reasonable.
For those following the German Bund market, which has completely ignored the US jobs report within the first 30min following the report, remember that EUROPE HAS ITS OWN SET OF PROBLEMS, hence why German 10yr yields are 34bps rich vs US 10yr yields as i write this...and the ECB wants to cut rates...yikes can this spread continue to widen?? Its already moved 10 bps this week!!
more later on the blog...govttrader out