By Rom Badilla, CFA & Maulik Mody – Bondsquawk.com
September 1, 2010
Today’s payroll data brought the week to end on a positive note easing concerns about the economy and dismissing fears of a potential double dip. Investors bid up stock prices and sold off Treasuries as they gained their appetite for riskier assets. Stocks ended in the green for a third day today and the yield curve steepened, allowing investors to enter the long weekend with reduced worries about the economy.
Economic Data
According to the U.S. Department of Labor, the private sector added jobs last month, curtailing concerns of a weakening economy and the prospects of falling into a recession. Private Payrolls for August increased by 67,000 people after the July estimate was revised upward by 36,000 to a final tally of 107,000 people. The August addition by U.S. companies surprised the market as forecasters expected an addition of only 40,000 people. BNP Paribas’ chief economist, Julia Coronado pointed out in a morning email to clients that “Most of the strength was in education and health care although temporary hiring picked up to 17k after a 1k decline and there continues to be modest hiring in leisure and hospitality. The slowing in private hiring came in manufacturing which let go 27k workers, mostly in the auto industry, after a 34k gain in July.”
For total changes in both the public and private sector, Non-Farm Payrolls fell by 54,000 in August versus consensus surveys of a drop of 105,000 people. The drop in the total number can be attributed to the 111,000 loss in government employment due to the conclusion of the Census as well as declines on a state and local level. In addition to the positive surprise, the prior period was revised upward to a decline of just 54,000 workers versus an initial estimated decline of 131,000 people.
The household survey or otherwise known as the official Unemployment Rate deteriorated in August. The Unemployment Rate in August increased to 9.6 percent, which was in-line with surveys and a tenth of a percent higher than the prior month. In addition, the U-6 measure, which includes workers who are discouraged as well as those who resort to working part-time, deteriorated as well. The U-6 measure increased to 16.7 percent in August from 16.5 percent in the prior period.
For more on today’s economic data, click here.
Interest Rates
Treasury prices fell as investors, assured by today’s comparatively better economic data, decided to reduce the proportion of risk-free government bonds in their portfolios. As a result, yields ended the week higher as the curve steepened. The yield on the benchmark 10-Yr note ended 7 bp higher at 2.70%, after reaching its lowest level in a year of 2.47 earlier this week. The 2-Yr fell slightly as its yield inched up 2 bp to 0.51%. The 5-Yr lost ground as its yield ended 6 bp higher at 1.48%. The Long Bond sold off pushing its yield 7 bp higher to 3.78%.
Inflation expectations, as indicated by the yield differential between 10-Yr Treasury and TIPS, widened 7 bp and to 1.67%.
European stocks ended higher and government bonds fell on the recently improved economic outlook. Germany’s 5-Yr Bunds fell to push its yield 6 bp higher at 1.34%. The yield on the 5-Yr bond of France climbed 4 bp to 1.62%. 5-Yr U.K. Gilts edged down, pushing its yield 2 bp higher to 1.73%.
Yields were mixed among peripherals countries. The yield on the 5-Yr Portugal bond gained 8 bp to 4.10%. Ireland’s 5-Yr bond gained pushing its yield 2 bp lower to 4.52%. Italy’s 5-Yr bond fell slightly as its yield inched up a basis point to 2.60%. Greece’s 5-Yr bond gained too, as its yield slid 4 bp to 11.49%. Spain’s bond fell to push its yield a basis point higher to 2.96%.
Credit Markets
For performance of investment grade corporate bonds, check today’s iTB Corporate Bond Indices.
The spread of the BofA Merrill Lynch U.S. High Yield Master Index, which tracks high yield corporate bonds, narrowed 10 bp for a second day to close at 6.62% over Treasuries with comparable maturities.
The difference in yield between 30-Year Conventional Mortgage Backed Securities and the 10-Year Treasury remained flat at 0.77%.
Across the Capital Markets
Stocks extended their gains for a third day. The S&P improved 1.32% to 1104.51. NASDAQ gained 1.53% to 2233.75. Dow Jones was 1.24% higher than yesterday to end the week at 10447.93. The index pared most of its losses from last month in the first three days of September. The CBOE Volatility VIX index shed 8.1% or 1.88 points to 21.31.
The dollar index, which measures the performance of the greenback against six major currencies of the world, shed half a percentage point to 82.02. The Euro gained 0.5% against the dollar to 1.2896. The British Pound improved 0.3% against the greenback to 1.5452.
Gold spot price slipped 0.3% to 1246.75 .Crude oil spot price gained 0.8% to $74.60.
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