Treasury Volatility Rises Most Since June Before Payrolls Report

Will Interest Rate Divergence Present Opportunities?
  • Global easing bias and ‘strong’ U.S. data at odds: DBS’s Leow
  • Economists see payrolls growth returning toward 2016 average

A gauge of Treasury volatility is headed for its biggest weekly increase since June before a report economists forecast will show monthly job growth declined, underscoring the case for traders who are betting the Federal Reserve won’t raise interest rates this year.

Merrill Lynch’s MOVE Index climbed from a 19-month low earlier this week as fluctuating oil prices roiled global stock markets and the Bank of England cut rates for the first time in more than seven years. U.S. jobs growth probably returned to its 2016 average in July after deviating sharply in the previous two months, according to a Bloomberg survey of economists before Friday’s Labor Department report.

“Treasuries are always volatile whenever payrolls are released,” said Eugene Leow, a fixed-income strategist at DBS Group Holdings Ltd. in Singapore. “We have a conflict with the easing bias of other global central banks and the high-frequency data from the U.S., which on balance seems to be fairly strong.”

Treasuries 10-year notes held two days of gains on Friday. Still, they’re set for a decline in the week, with the yield having climbed four basis points to 1.50 percent as of 7:18 a.m. in New York, Bloomberg Bond Trader data show. The price of the 1.625 percent security due in May 2026 was 101 5/32.

The MOVE index was at 67.1 Thursday, compared with 64.1 at the end of last week, and it’s up from 63.7 on Monday, the least since December 2014.

U.S. nonfarm payrolls probably increased by 180,000 in July following a surge of 287,000 in June, according to the median estimate of a Bloomberg survey of analysts before the data is released later on Friday. Job gains averaged 172,000 a month in the first half of this year.

Bloomberg’s U.S. Economic Surprise Index, which measures whether data beat or missed forecasts, has slipped to 0.172 compared with a 19-month high of 0.189 that was reached July 26.

Futures traders assign a 37 percent chance the Fed will raise rates from the current range of 0.25 percent to 0.5 percent by December, compared with 93 percent probability at the start of the year.

Fed Chair Janet Yellen will have an opportunity to air her views on the economy’s progress when she speaks on Aug. 26 at the Kansas City Fed’s annual policy symposium in Jackson Hole, Wyoming.

Independent strategists David Ader and Ian Lyngen, voted the top Treasuries strategists for 2016 in an Institutional Investor poll last month, pointed out that jobs data tend to disappoint in August, including in each of the past three years.

Release DateResultMedian Analyst Estimate
Aug. 7, 2015215,000225,000
Aug. 1, 2014209,000230,000
Aug. 2, 2013162,000185,000

This is “by no means a definitive pattern, but a consideration as we head into the event with the modest liquidity of the summer-trading environment,” they wrote in a research note. “Given the relevance of the jobs report to monetary-policy expectations and the limited data calendar between NFP and Yellen’s Jackson Hole speech, we’re open to a more meaningful price response.”

Post-BOE Rally

The Bank of England’s decision Thursday reinforced the trend for monetary easing worldwide, and it’s likely to limit the effects of a positive payrolls reading on Treasuries, according to Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan.

“Given what we had yesterday from the BOE, investors will have in their mind the fact that central banks and monetary policy is playing in favor of bonds. This is creating a positive environment also for Treasuries,” he said. “This means that if you get a better-than-expected reading, upside pressure in yields should remain limited anyway.”

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