Treasury yields rose following an employment report that spared investors yet another day of fire sales for equities. On Thursday the treasury yield curve fell with three-month bills yielding a big-fat zero, two-year yields at a record low while the benchmark 10-year fell to match its pre-QE2 panic low at 2.33% of October 2010. The revision to June labor market data is comforting and the addition of more than forecast jobs in the July report is proof that the economy actually has some traction may not yet be enough to signal the end of losses for equity markets and gains for treasuries.


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Eurodollar futures - The treasury market was acting a little nervous ahead of Friday's jobs report in the event that a half-point slide in government yields already this week might prove susceptible to a better than average number. That optimism proved astute with the yield on the 10-year backing off from a slide to 2.33% all the way up to 2.53% as employers added 117,000 positions last month. The initial June reading of 18,000 was boosted to 46,000 while private payroll positions were increased by 157,000 during July. The subsequent selling in bonds abated as the S&P 500 index lost 20-points in a matter of minutes as investors returned their attention to core financial dislocation problems around the world. The recognition that the admittedly welcome grain of good news is just that. Few of the reasons that sparked selling of assets in fear of financial market meltdown have disappeared with the emergence of a decent U.S. number. Recently the September treasury note future reversed losses driving yields back to 2.47%. Deferred Eurodollar contracts also halved session losses to trade down five basis points.

European bond markets - The ECB bought bonds issued by Portugal and Ireland for a second day as part of an effort to calm jittery markets. It earlier offered to add limitless liquidity to the region's banking system for up to six months. After jumping on Thursday euribor futures surged for a second day as the central bank failed to quell concern of the limited impact of last month's political agreement to step-up action to prevent contagion in the Eurozone. Most contracts rose by over 25 basis points sending implied yields on the December 90-day contract lower over the two-day period by 32 basis points to 1.30%. As recently as July 22 the yield implied by the contract stood at 1.81%. September bunds are off a session low at 131.90 and recently traded with a session loss of 60 ticks at 132.19 as peripheral yields ease relative to those on German debt.

Australian bills - Bill futures were again the star-performer after the RBA's quarterly report glossed over a deteriorating picture for inflation, which it said would remain above target for possibly longer. The slump in implied yields of up to 64 basis points was dramatized by a near-halving in the pace of growth. The RBA hacked at its GDP forecast for the year from 3.24% to 2% stating that the debt-crises of U.S. and Europe have room to unfurl in "disorderly and disruptive" manner. Government bond yields slumped by 22 basis points and the most in over two-years to end the week at 4.51%. The March 2013 90-day bill future surged to 96.23 to imply a three-month Libor by maturity seven-months from now of 3.77% and compares to the RBS's short-rate of 4.75%. As I noted in this week's earlier commentary, the discounting process has begun.

British gilts - The FTSE 100 index of leading stocks earlier fall by 2.3% was eradicated before selling resumed. The mid-morning reversal for U.S. stocks seemingly in response to a market rumor that the U.S. might face a weekend ratings downgrade is partially behind the onslaught of the more bearish tone. Short sterling futures have moved back towards session highs and have made daily gains of six basis points driving the yield curve ever-flatter. Meanwhile gilt futures expiring in September are heading back towards unchanged on the day in an attempt to build on seven-straight gains, which has the contract trading at 126.56 where the yield sits at 2.74%. Earlier on Friday the contract had surged driving the yield to yet another record low at 2.55%.

Japanese bonds - It's still no time to ditch the safety of government bonds say Tokyo-traders despite the recent effort by the bank of Japan to alleviate some of the steam in the rice-cooker. The 10-year yield eased to 0.997% to close the week while Japanese stocks nursed a closing loss of 3.7% on Friday. June's coincident index rose to 108.6 while the leading index also rose indicating that measures taken to help heal the economy after a March-earthquake were working. But there seems little the Japanese can do to fight off debt crisis elsewhere in the world.

Canadian bills - The net addition of 7,100 new jobs across the Canadian economy was half the expected pace, but with the dip in the rate of unemployment to 7.2% and the improvement in the U.S. labor market adding to positive sentiment, bill prices remain just about unchanged on the day. Government bonds this week moved to a discount relative to treasuries as demand for Washington paper leapt in light of rising risks to global growth. The discount failed to come in by more than two basis points in Friday's action with the 10-year Canadian yielding 2.55%.

Andrew Wilkinson

Senior Market Analyst       

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