Economic and Bond Market Recap: Treasuries Fall, Yields Steepen

by: Bondsquawk, CFA

by Maulik Mody

Stocks inched up higher and Treasuries eased yesterday, after employment reports showed increased hiring in the private sector and the Fed said in its beige book that labor market is improving. Unrest in the Middle East continued to push oil prices higher. The dollar fell against other currencies while Gold climbed to an all time high.

Economic Data

The ADP employment report showed a pick-up in private sector hiring to 217k in February from an upwardly revised 189k in January. Economists had expected an increase of 180k last month. The ADP has over-predicted private payrolls by 122k over the past two months before which they under-predicted by an average 56k over the preceding six months. Hence economists at BNP Paribas expect private payrolls to have increased by 185k during February.

The Mortgage Bankers Association showed that mortgage activity in the US decreased by 6.5% for the week ended Feb 25, as both purchases and refinancing fell over 6%. The 30-year fixed mortgage rate fell 16 bp to 4.84%.

The latest Beige book reported released by the Atlanta Fed indicated that the economy is improving at a moderate pace and the labor market is stabilizing. The report covers the period from 4 January through 18 February, when high-frequency economic data were indicating improvement, especially in the manufacturing sector, while the housing market remained depressed. The Beige Book indicated that almost all districts “experienced solid growth in manufacturing production.” While “construction remained at low levels across all Districts,” retail sales increased, tourism improved and “labor market conditions continued to strengthen modestly.”

Interest Rates

Treasuries fell as yields gained across the curve on reduced demand for fixed income products after economic releases yesterday suggested that the labor market was improving in a steadily improving economy.

The yield curve steepened, as rates in the longer end of the curve rose more than in the front end. The 2-Yr fell as its yield pushed 8 bp higher to 0.69%. The belly of the curve steepened as the yield on the 5-Yr rallied 7 bp to 2.17%. The benchmark 10-yr note fell pushing its yield 8 bp higher to 3.47%. The Long Bond also fell as its yield gained more than 8 bp to 4.56%. Click to enlarge:

Inflation expectations, as seen by the yield differential between the 10-yr Treasury and 10-yr inflation indexed bonds (TIPS), increased 5 bp to 2.47%, its highest level in a year. Click to enlarge:

Across the Capital Markets

Stocks ended slightly higher on improved economic outlook. The S&P climbed 0.2% to 1308.44, while NASDAQ gained 0.4% to 2784.07. The VIX Volatility index fell 1.5% to 20.70.

The DXY index, which measures the dollar against six major currencies, fell 0.6% to 76.651. Euro gained 0.7% against the dollar to 1.3866. The cable (GBP/USD) gained 0.3% to 1.6325, its highest level in a year.

Crude oil pushed higher amidst unrest in Libya and ended the day at 102.40 a barrel. Gold pushed to an all-time high of 1434.50.