Bonds: US bond yields dragged higher by correction in Bunds
These were the movements in some of the most widely followed long-term sovereign bonds:
US: 2.12% (+7bp)
UK: 1.84% (-1bp)
Germany: 0.36% (+0bp)
France: 0.65% (+2bp)
Italy: 1.48% (-3bp)
Spain: 1.47% (-1bp)
Japan: 0.37% (+2bp)
Portugal: 2.09% (+0bp)
Greece: 10.68% (+21bp)
US Treasuries ended the week on a down note on Friday after a week of sharp losses in the US dollar as well. Flows reversing back into Treasuries were detected by some traders on Friday after a week in which rising Bund yields were seen by several analysts as the main catalyst behind gains in US Treasury yields.
Extreme market positioning and weakened market structures were put forth by analysts, traders and market observers as the fundamental causes for the back-up in yields.
The yield on both 10-year Bunds and US Treasuries ended the week higher by 20 basis points. That left German government bond yields ten years out just four basis points below where they were on 9 March, before the European Central Bank embarked on quantitative easing.
A sharp drop in the US dollar, a surprisingly weak reading on US GDP on Wednesday and traders preparing for next week's US non-farm payrolls reports may also have played a hand.
Interestingly, ahead of next Friday's monthly US employment report, the sub-index for jobs in the ISM manufacturing sector purchasing managers' index fell below the 50-point mark in April. At 48.3 it was the lowest reading since September 2009.
That seems to point to the US labour market taking a little while to pick up, according to Bill Hubard, chief economist at Bankor.
55% chance of first Fed hike by September
Last week the Treasury 2-year yield rose 8 bps (new issue roll adjusted) to 0.60%, 3-year 12 bps to 0.95%, 5-year 18 bps to 1.51%, 10-year 20 bps to 2.12%, and 30-year 21 bps to 2.82%.
On Friday July fed funds futures were flat at 0.15%, continuing to price only ‘about’ a 10% chance of a June rate hike. Following the employment cost index upside surprise, on Friday, October did shift to pricing a hike by September as more likely than not, but only barely, with a 1.5 bps drop on the week to 0.265% consistent with ‘about’ a 55% chance of a first hike by September.
The odds of a second rate hike in 2015 stood at 20% as of Friday's close, having started the week at only ‘about’ 5.0%.