How low will the bond market go?

Friday, November 02, 2007

ECONOMIC DATA / NEWS

Building on yesterday’s list of economic data that didn’t fall anywhere near economists’ expectations, October’s employment payrolls surged upward by 166,000, which is double what forecasts were.  The seasonal factors that boosted the number were education and health care, which added 43,000 positions, and leisure and hospitality, which grew by 56,000.  Some of the schools that start a little later affected these numbers, and we’re approaching the season when more people tend to get sick.  We’re also nearing the holiday traveling season, so those services (i.e. airlines, hotels, etc.) are gearing up for increased activity.  Payrolls grew in spite of the loss of 48,000 jobs between manufacturing, construction, and retail.

The unemployment rate stayed at 4.7%.  Average hourly earnings were a little low at .2%, while the average hours worked was steady at 33.8.  Aside from the fact that all of these figures were in line with forecasts, they generally take a back seat to the payrolls data in terms of market impact.

And, the only thing more surprising than the strong jobs report was the financial markets’ reactions.  Stocks barely crept higher at opening, and now the indices are mixed with the Dow down about 60 points.  And even more shocking is the bond markets.  Bonds initially took a hit immediately after the payrolls data came out.  However, they rallied very shortly after the stock market opened.  This is one of those very rare instances when a piece of economic data of this significance comes in WAY above expectations and yet the bond markets saw dramatic gains.  Clearly the sharp drop in the stock market yesterday is a heavy weight for traders to shake off.  With money rapidly exiting stocks, there is nowhere to put it but bonds (or gold, which is up near all-time highs around $800).

TECHNICAL ANALYSIS

After a brief dip, that was as much as 12bp early on, the FNMA 30-year 6.0% is now up 9bp from yesterday.  The improvement came between about 9:30 and 10:00 AM ET, during the first half hour of the stock market opening.  We still have a very tough resistance at 101.06, and prices are currently at 101.00.  But, the fresh one year low in the 10-year Treasury yield may be enough to finally propel prices through this level.

That Treasury yield is all the way down to 4.31%, and took an extremely brief dip below 4.30% for the first time since 2005.  Other than 4.30% acting as a mild psychological support, there is not much in the way of the yield falling a lot further.  The stochastics barely made it out of overbought territory, but it was enough to allow them to cross downward again.

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