Don't let anyone try to convince you that today's low interest rate environment is dull and that opportunity is a thing of the past. Within the space of less than 24 hours the 10-year treasury yield has swung by a full quarter of one percent or 25 basis points sparked by a combination of a slowing economy and what measures might be adopted by the central bank to halt the slump. Treasury futures on Friday ran in to stiff overhead resistance after benchmark U.S. government yields approached the August 23 lows of just below 2%. On Thursday the yield touched 2.27% but that was before the August employment report delivered a net zero reading for employment gains during the month. Adding fuel to the fire was a revision to already lackluster July data.


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Eurodollar futures -December treasury note futures jumped by about three-quarters of a point to 130-10 following the labor data, which even allowing for a Verizon labor dispute, provided little comfort for economy bulls expecting a rebound. And there is little official expectation of a change after the CBO recently updated its economic forecasts to predict an unemployment rate of 9.1% this year and 9% next year. But with a July reading of 87,000 new jobs and a zero return in August you can plainly see just how far employers are from even maintaining an unchanged unemployment rate. For that to happen, economists state that the economy must add at least 150,000 jobs. Weekly initial claims data is the first port of call when clue-hinting - that reading must first slip under 400,000. The series has, however, backed away from that line in the sand. The bullish bond market tone emanating from the report also sent shock through credit markets and caused a slump in recently rejuvenated benchmark stock indices. The Eurodollar curve flattened as dealers sold front month futures and bought deferred maturities on account of growing liquidity fears over in Europe.

European bond markets - European bond markets got messier at the end of the week. The slowdown in activity is becoming ever-clearer as data emerges, while fears over the region's governments' ability to prevent the sovereign debt crisis from spreading are once again growing. Italian government bonds fared the worst streak of losses in euro-era history by falling for a tenth-straight day as yield spreads widened relative to German bund yields. Spanish bonds also declined and in this environment it's hard to tell whether the ECB's intervention policy is either in action or temporarily halted. The long-end of the euribor futures curve made sizeable gains on growing expectations that the central bank might yet be forced in to a rerun of its 2009 policy gaff having raised rates to counter inflation, just to have a global collapse thrown back in its face. As Yogi Berra might say, it looks like deja-vu all over again. German bunds jumped forcing the yield back below the U.S. 10-year yield showing the heightened sense of rising risks to the global economy.

British gilts - As with the Eurodollar strip short sterling futures saw nearby losses while deferred contracts made a subtle advance. The December gilt contract needed few excuses to reverse a run of recent losses with the December contract almost one full point higher at 128.00 sending the yield down by 10 basis points to 2.44%. The British economy continues to limp along in light of declining business and consumer confidence.

Australian bills - Hopes for a Fed-fix for the global economy have recently taken the shine off a probable monetary ease from the domestic central bank. When yields last plunged in the third week of August the probability of an official RBA reduction grew to one-in-three. However, with hopes shifted from a domestic to a global remedy likely at the expense of the Federal Reserve, hopes have dwindled to one-in-five at next Tuesday's meeting. Following today's drab U.S. employment report, which raises the prominence of risks to the global economy, Aussie yields plummeted once more as investors predicted that while the Fed might take the lead, other central bankers might be forced to follow. The government benchmark yield dropped by 10 basis points to 4.30% while the bill market surged by up to 14 basis points.

Canadian bills - The short end of the Canadian curve remains as flat as a pancake with maturities from December through March 2013 trading within an 11 basis point band stuck close to 1%. The bill market made larger gains than did the Eurodollar strip as investors conclude that even though an interest rate cut from the BOC is unlikely at this stage, a deterioration in either next week's domestic labor report or a further weakening in the U.S. labor market would increase the risks to a change of heart. The yield on the government benchmark slipped by eight basis points to 2.30% while similar yield declines were evident across the bill complex.

Andrew Wilkinson

Senior Market Analyst       

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