30-yr treasury bonds have been in a consolidation phase over the past week, taking a break from the September sell off, in which 7 full points were shaved off the December 30-yr futures price. Currently, the Dec future is trading 152’08, with the recent high coming in at 159’16 on September 7. The impetus for the selloff has been the Fed indicating that a reduction of balance sheet will commence in October, Feds speak that inflation may pick up suddenly entailing a more hawkish posture and a lessening of global tensions, particularly in the Korean peninsula.
Friday morning at 7:30 central, the Employment Situation (we called it the Unemployment Report on the floor) will be released. Consensus estimates call for an increase of 100K Nonfarm Payroll jobs, with the unemployment rate staying steady at 4.4%. Average Hourly Earnings bears watching with the prior month being 0.1% month over month, and September consensus being 0.3%. This report will be the first to register effects from Hurricane Harvey and Hurricane Irma.
If the report handily beats consensus, I’d say north of 200K, I would expect bonds to break out of this week’s consolidation to the downside. This would be a continuation of September’s bearish move, and could portend much deeper weakness in the coming weeks. If the report is a dud, and comes in below expectations, bonds should have a bounce and possibly move to the 154-155 handle. I would take any strength as an opportunity to establish short exposure.
Something to keep in mind is that a JPMorgan Chase survey for the week through Oct 2 found that clients as a whole soured on Treasuries, with 44% holding a short position relative to their benchmark. That’s the most since 2006 and up from 30% the prior period. Speculative accounts show a record 70% were short! It is a crowded trade. Thus any bounce in bonds could spark a short covering rally sending bonds temporarily higher. Again, I believe the intermediate term prospect for bonds is down, it’s a matter of getting the right timing and placement of the trade, and taking advantage of any short term bounce to establish the position.