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How Are Bond Traders Reacting to the Latest US Jobs Report?

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Slipping yields

Bond yields have been slipping since the US non-farm payrolls data released on Friday, June 2, but the reason for the drop in yields was most likely the falling probability of multiple 2017 interest rate hikes by the Fed. Bond markets (BND), according to Reuters’ calculations, are still pricing in a 94% probability for a rate hike in June, but the probability of a September rate hike has been reduced to 50%. The chances of a hike in December slipped below 25%.

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The US Treasury ten-year bond price (IEF) closed the week at 126.62, as compared to 126.19 the previous week. The ten-year yield fell 10 basis points to 2.15% from 2.25%, while the two-year bond yields (SHY) remained unchanged at 1.29%. The fall in longer-term yields (TLT) reflect the reduced expectations for a rate hike in the future months.

Bond traders reduced their long positions

According to the latest CFTC (US Commodity Futures Trading Commission) reports, large speculators in the bond markets have decreased their net positions for the first time in six weeks. A total net position of ~258,000 contracts have been reported, which represents a decline of ~104,000 contracts as compared to the previous week.

The CTFC data is published on Friday but reflects traders’ positions as of the Tuesday of the same week, and so traders would have exited their long positions before the non-farm payrolls data came out, which helps explain the reduction in net positions.

Key movers for bond yields this week

There’s no major data from US markets this week, but bond traders will be focused on the ECB’s (European Central Bank) policy meeting and the upcoming UK Elections. The ECB is likely to continue with its current policy setting, but a hawkish bias is likely to have an impact on European bond markets (GGOV) and will add further pressure on US yields.

Risk aversion, if any, arising out of the recent attack in London and the UK election uncertainty will add to the demand of US bonds, given their safe-haven status.

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