Employment Figures May Have A Message For Bond Traders

When the bond market reacts to the government's monthly employment reports, does it fully reflect the information they contain? Not according to a recent Salomon Brothers Inc. study, which spies a profit opportunity in the market's gyrations.

In a trading simulation based on price data over the past six years, Salomon researchers Alexander Saitta and Chia-Yu Chang used the closing price of the Treasury bond on the days of the employment report to initiate positions in T-bond futures. If the bond price closed higher than the previous close, they bought a futures contract at the new closing price. If it closed lower, they sold futures short. In either case, the position was held until the end of the last business day of the month.

The study indicated that this trading strategy would have produced a profit 58% of the time. The average profit per monthly trade over the six years came to $554, and total cumulative gains grew to $39,905--a statistically significant result. In sum, the bond market's move in the wake of the employment release often foreshadows the direction over the rest of the month--presumably, says Chang, because subsequent economic data tend to confirm the employment report's message. From this perspective, it's hardly a surprise that the market rally touched off by the relatively modest employment rise reported in early January seems to be continuing.