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August 7th, 2012
* Technical Picture Paints Range Bound Yields
* Corporates Outperform Treasuries as Yields Decline
* The Employment Report is Weaker Than It Appears
* Goldman Sachs: Fixed Notes Offer Near 5% Yield
* Unanticipated Consequences of the Euro-Zone Banking Union

Technical Picture Paints Range Bound Yields

Posted: 06 Aug 2012 09:00 PM PDT

By Rom Badilla, CFA

August 7, 2012

After kissing significant resistance <http://www.bondsquawk.com/2012/08/02/rally-ahead-after-treasury-yields-kiss-resistance/> at 1.46% mid-week which was followed by the brutal backup in yields spurred by Friday’s payroll data, the yield on the 10-Year appears range bound using a technical lens according to Credit Suisse’s analyst team.

Research analysts David Sneddon, Christopher Hine, Pamela McCloskey, and Cilline Bain offered their take in the latest U.S. Fixed Income Daily report regarding the yield on the 10-Year U.S. Treasury:

10yr US yields remain in a volatile range and have again reverted to test key support at 1.60% – the 1.8% retracement level and trend support. A break above here is needed to put in a bigger base and see a push up to 1.675/70% with more solid support at 1.73/77% – the June chart peak and the 38.2% retracement of the March-July rally.

Below 1.50/49% would aim at 1.45/445%. Extension through here is needed to target 1.39/38% – trend resistance and the record yield low.

Given this, they look to add at 1.50/1.51% to their current position which was bought at 1.55%. Their target remains at 1.39% which is a 16 basis point move from cost. This equates to about a 1.4% gain in dollar price on the 10-Year which currently has an 8.94 duration (16 basis point x 8.94 duration = 1.4% dollar price gain). In addition, they have a Stop-Loss set at 1.60%.

Support lies at 1.60% area which is where they could see buyers emerge since it is the top of the channel which acts as support, and the 61.8% Fibonacci retracement support level. Beyond that, they see bigger support at 1.73% yield peak.

 

The Long Bond has been ranged bound and with the recent backup, the focus for the 30-Year U.S. Treasury is on finding near-term support.

30yr US bonds have reversed again to test support at 2.70/72% – trend props and the 61.8% retracement of the June-July rally. We look for this to try and support again and only above it would see a firmer yield base for 2.78% with more solid support at 2.83/855%.

Below 2.585% aims at 2.545%. Extension through here is needed to retarget the 2.45/44% barrier.

 

They are currently flat but look to buy should the 30-Year reach 2.70% and would initiate a Stop-Loss at 2.752%. Their yield target would be set for 2.60% which for a 10 basis point change would equate to a 1.9% gain given the Long Bond’s duration of 19.48 years (10 basis points x 19.48 duration = 1.9% dollar price gain).

 

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The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

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Corporates Outperform Treasuries as Yields Decline

Posted: 06 Aug 2012 02:00 PM PDT

By Rom Badilla, CFA

August 6, 2012

With no major economic data releases, U.S. Treasuries took a respite from last Friday’s selloff as yields were little changed across the maturity spectrum. After spiking 9 basis points after Friday’s release of the employment data, the yield on the U.S. 10-Year finished flat on the day by closing at 1.56%. The Long Bond was down slightly in price as the yield on the 30-Year maturity inched higher by a basis point to 2.65%. The belly of the curve outperformed rest of the stack as the 5-Year gained six cents to a price of $99.26 as the yield fell by a basis point to 0.65%. The front-end of the curve remains anchored to Fed policy as the 2-Year remained at a yield of 0.24%.

In Europe, yields continue to tumble for the time being across the periphery. Spanish 10-Year bonds ended the day at 6.74%, a decline of 11 basis points. Italian benchmark notes of the same tenor fell 4 basis points to 6.00%.

Yields in developed economies fell as well. U.K. 10-Year Gilts dropped 6 basis points to 1.50% while German Bunds ended the day at 1.40%, a decline of 3 basis points.

Despite the uneventful action in the Treasury market, Corporate Bonds continued to outperform their government counterpart, led by the Financial Sector.

According to Trade Monster’s Bond Trading Center <https://www.trademonster.com/Products/Bonds.jsp?PC=iTB> , Financial bonds on average gained in dollar price as yields decline in the longer end of the curve. Morgan Stanley led the charge as the yield on their benchmark note fell 13 basis points to 5.23% which translates to an appreciation 0.9% on a dollar price basis. Goldman Sachs improved by 0.5% in price as the yield on their 10-Year dropped 7 basis points to 4.39%.

The laggard for the day was Barclay’s 10-Year note. The benchmark note for the London based bank saw a decline of just 2 basis points to 3.82%.

Intel Corporation outperformed many of its peers in the Industrial sector as their benchmark note gained 0.7% to a dollar price of $109.47 or a yield decline of 9 basis points to 2.15%. Comcast ‘s 10-Year jumped by the same percentage amount to $104.65 to yield 2.59%, which is lower by 8 basis points from the previous close.

WalMart’s benchmark note underperformed the rest by widening a basis point to yield 1.88%.

Information and quotes courtesy of Trade Monster’s Bond Trading Center <https://www.trademonster.com/Products/Bonds.jsp?PC=iTB>

<http://www.bondsquawk.com/wp-content/uploads/2012/08/2012-08-06-Corporate-Snapshot.png>

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The Employment Report is Weaker Than It Appears

Posted: 06 Aug 2012 11:00 AM PDT

By Walter Kurtz – Sober Look <http://soberlook.com/2012/08/the-employment-report-is-weaker-than-it.html>

August 6, 2012

The US employment numbers this morning generated a sharp rally in risk assets, with crude oil rising 3.5%, S&P500 up 1.8%, copper up 1.6%, and Brazilian Real up 90bp. It’s worth taking a quick look at what in this employment report is causing such euphoria and whether it is justified.

The markets have focused on the private payrolls increase, which was 62K higher than the forecast. In particular it was the pickup in manufacturing payrolls of 25K vs 10K expected.

<http://1.bp.blogspot.com/-i8P6RzqWFMI/UBvpFGxXmtI/AAAAAAAAJZI/L35oZqmcR5g/s1600/Private+payrolls.PNG>
Private payrolls (in thousands, MoM)

This is certainly great news, but unfortunately this report is not as strong as the markets’ reaction indicates. Here are the reasons:

1. The prior month in private payrolls was revised down by 11K. That’s not an insignificant revision.

2. The unemployment rate actually went up from 8.2% to 8.3% and underemployment (U6) went up from 14.9% to 15%. In fact, this is a third month in a row that saw an increase in U6.

3. Hourly earnings were lower than expected (0.1% vs 0.2%). The YoY growth in hourly earnings is 1.7%, the lowest since 2010. This is not positive for consumer spending.

4. Growth in temp payrolls continues to be significantly stronger <http://soberlook.com/2012/07/when-going-gets-tough-tough-get-temps.html> than in permanent jobs. It tends to indicate lack of confidence among employers.

<http://1.bp.blogspot.com/-Sd86FRbEz7s/UBvu4DvNCmI/AAAAAAAAJZs/wYCPGex-eB0/s1600/Temp+empl.PNG>
Temps payrolls (white) vs. total payrolls (yellow)

5. Manufacturing payrolls increase was driven to a large extent by fewer auto plants being idled for retooling than is usual for this time of the year. It’s basically a seasonal glitch that may end up being reversed in August.

Bloomberg <http://www.bloomberg.com/news/2012-08-03/u-s-july-payrolls-rise-more-than-forecast-unemployment-8-3-.html> : – Factory payrolls increased by 25,000, more than twice the survey forecast of a 10,000 increase and boosted by a 12,800 pickup in employment at makers of motor vehicles and parts.

The figures may have reflected fewer shutdowns at automakers for annual retooling related to the new model year, indicating the jump will be reversed this month. Chrysler Group LLC and Ford Motor Co. (F) are among companies that said they would idle fewer plants.

6. Another survey of employment also conducted by the government called Household Employment Survey seems to contradict the headline number.

Stateseman.com <http://www.statesman.com/news/nation/a-tale-of-2-us-employment-surveys-at-2427327.html> : – [in the Household Survey the] government workers ask whether the adults in a household have a job. Those who don’t are asked whether they’re looking for one. If they are, they’re considered unemployed. If they aren’t, they’re not considered part of the work force and aren’t counted as unemployed. The household survey produces each month’s unemployment rate.

This other survey indicates a 195K loss of payrolls. To be fair, the household survey at times also showed higher job growth than the more commonly used number. Nevertheless this discrepancy is large enough to question the veracity of the headline number.

The Telegraph <http://www.telegraph.co.uk/finance/jobs/9449700/US-jobs-data-mixed-in-July-what-the-economists-said.html> : – Stephen Stanley at Pierpont Securities: “It’s marginally better on the balance. More importantly we have a drop in household employment, which is not such good news. Even with the better-than-expected payroll number, it’s not sufficiently big enough to change the big-picture view. The economy is growing but not at a satisfactory rate to bring down unemployment.”

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Disclaimer
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