Further to yesterday....... more pandemonium !

Friday 8th May 2015

 

Further to yesterday....... more pandemonium !

 

"Investors caught off guard by worst Eurozone bond turmoil since crisis" , The Financial Times, p.1

  and

"Turmoil in Eurozone government bonds triggers volatile trading" , The Financial Times, p.31

 

Okay, we know about the factors that have provoked the sharp turnaround in bond market sentiment over the last few weeks : oil price rises and signs of Eurozone recovery leading to receding fears of deflation, expectations of a US rate rise, herds of wounded bondholders attempting to bail out of  their positions at the realisation that the strategy of buying bonds with minimal or even negative yields may have been flawed, etc etc. But these moves really are petty extraordinary. Yesterday the yield on the German 10yr bund jumped 21 basis points to 80bp, before dropping back to near enough unchanged on the day.

Some suggest that the fact that bond prices (which trade inversely to yields) were able to regain their losses on the day suggests that the precipitous correction to hugely overbought bond markets may itself have run its course. That would be quite an assumption. What it does indicate is the dangerously volatile nature of bond markets these days, a result of a lack of liquidity and shortage of old-style market-makers to absorb large orders. Don't let us get stuck on that old record again  --  suffice to say, when the going gets rough, quite a few of the "big" players simply turn off their trading platforms, which of course only magnifies the problem. The only certainty is that volatility is here to stay.

 

All eyes on US jobs data today.......

"TRADING POST" , The Financial Times, p.31

As a pointer to the timing of a Fed decision to raise rates, employment numbers carry more weight than most. US nonfarm payrolls is expected to have grown by 224,000 in April, and the overall unemployment rate to have fallen from 5.5% to 5.4%. Stronger figures would increase the likelihood of a rate rise sooner rather than later, weaker ones would have the opposite effect. All pretty straightforward, right ?

As ever, not quite.... in the greater scheme of things the employment data has actually been pretty strong for a while but because this has yet to spill over into upward pressure on wages, there has been little or no inflationary pressure as a result .... so far. So watch out for the Average Earnings number in today's report, due to show a dip in growth to 0.2%