Many are perplexed by the ‘strength’ in Treasuries as yields collapse despite a headline payroll print propagandized (choosing to be non-believers in the bond-market’s all-knowing eye). As Deutsche Bank notes, for well established reasons, a multi-decade Pavlovian response to much stronger than expected US data has been higher Treasury yields, which usually provides some USD lift. Last Friday, this plainly did not work, which proved extremely costly for many in the trading community. At a minimum Pavlov’s dog choked, but is Pavlov’s dog dead? The short answer is no, but Pavlov’s dog may have taken off the summer.
As Deutsche Bank reports,
One explanation for the surprising bond and FX response to the NFP data has been to fit the data to the market price action. This will prove wrong. The April employment was genuinely strong. The last 3 months payroll changes are all above 200K and consistent with some growth acceleration beyond weather distortions. Even the most disputable aspect of the report, the decline in the unemployment rate was achieved with a decline in participation rate, but only back to December levels. US data did not support any ‘capitulation’ from the strong US growth story.
The bad news is that it obviously did not stop a capitulation of many short Treasury and short USD trades. Which raises a couple of critical questions – how can we reconcile the price action with strong US data, and what message is the price action conveying?
Treasury resilience – 11 reasons, or 11 excuses?
A starting point is to recognize that US Treasury resilience remains central to much of what is happening to markets and currencies this year. Without flow of funds data – Q1 data is due on June 5th – we do not have a complete picture, but here are 11 explanations for Treasury solidity:
(i) The Fed was right – the ‘stock’ effect is more important than the ‘flow’ effect, and the Fed’s large bond holdings, particularly at the back-end, will suppress yields far into the future;
