Last weekend, U.S. treasury yield curve was bullish flattened due to mainly increase in short-end and mid-term yields after release of NFP in August.
| Employment: (SA M/M Change, 000s) | Aug | Jul | Jun | Y/Y | 2014 | 2013 | 2012 |
|---|---|---|---|---|---|---|---|
| Payroll Employment | 173 | 245 | 245 | 2.1% | 1.9% | 1.7% | 1.7% |
| Previous | -- | 215 | 231 | -- | -- | -- | -- |
| Manufacturing | -17 | 12 | 1 | 0.9 | 1.4 | 0.8 | 1.7 |
| Construction | 3 | 7 | 1 | 3.4 | 4.8 | 3.7 | 2.1 |
| Private Service Producing | 164 | 211 | 221 | 2.6 | 2.2 | 2.2 | 2.2 |
| Government | 33 | 21 | 27 | 0.6 | 0.0 | -0.3 | -0.8 |
| Average Weekly Hours - Private Sector | 34.6 | 34.5 | 34.5 | 34.5 (Aug.'14) | 34.5 | 34.5 | 34.4 |
| Private Sector Average Hourly Earnings (%) | 0.3 | 0.2 | 0.0 | 2.2 | 2.1 | 2.1 | 1.9 |
| Unemployment Rate (%) | 5.1 | 5.3 | 5.3 | 6.1 (Aug.'14) | 6.1 | 7.4 | 8.1 |
In 10 year tenor, the yield closed at the critical level I posted before announcement of NFP which is around the 200 days moving average for both of current yield and lagging span yield. Today is a holiday in U.S. I think we should confirm a 2nd day movement for the labor market data.
Deep consideration of employment data would be continued. If we see the AHL, average hourly earnings, we can positive prospects for the economy. In a beige book, last week, they referred they could find somewhat clues for improving wages in some states. Albeit some pessimists argued the payroll data was disappointed, if we consider the seasonal movement, this data seems not bad, especially in yearly growth, 2.1%, higher than yearly average in 2014 and 2013. Moreover, total payroll numbers in previous month and before that were all revised up by 30K and 14K, respectively.
This could be the signal to boost private consumption which decrease burden of high inventory ratio weighing on manufacturing economies. The time for Fed to first hike interest rate is coming... In a light of yield curve, this would not be news for flattener positions. So, we should confirm additional movement of 5s30s this week.
2. Whilst UST 10y yield is at its critical level, Chinese foreign reserves decreased more than expected increasing worries about selling bonds
Chinese foreign reserves declined by 93.9 billion dollars to 3.56 trillion dollars at the end of August, from 3.65 trillion a month earlier. Market expected 3.58 trillion dollars.
After release of this, longer-end yields in European bond markets are pushed higher.
As I posted earlier, current picture is not same with 1994's rate hike for U.S. Fed. We are facing the declines of global foreign reserves including China. Furthermore, in line with possible diminishing fantasy about global deflation toward the end of this year, we should be cautious to invest long-end tenor bonds for now.
3. Think about the criticism that declining Chinese foreign reserves would not push the bond yields higher further
On the other hand, there are some criticism about current story that sell-off of treasury bonds in U.S. or Germany by EMs including China will hardly weigh on western bond markets further.
They are on the bullish side of developed countries' government bonds because...
(1) They see the global deflationary environment to be further. This could ultimately weigh on the bond yields especially in long-end tenor.
→ But, I am on an opposite side. Deflation is only fantasy...
In fact, the deflationary force has been enhanced by global trade turmoil and in line with currency wars. And this has caused recent sell-off of all kinds of assets focusing long end bonds especially.
(2) There are sufficient demand for US and German government bonds due to hedging risk assets in a light of risk aversion.
→ I don't think so. We are ahead of the start of normalization of global monetary policies with current so called quantitative tightening. We should not expect ample liquidity conditions any more.
(3) The pressure of sell-off about treasury bonds could be offset by demand for USD due to bet on strong USD in line with Fed's fund rate hike.
→ This seems somewhat reasonable. But, I do not agree with this because we should face the drought of liquidity conditions referred in (2). That said, the demand is nowhere because traditional demanding countries, EMs, are facing drought of liquidity. Although this could not offset the pressure pushing yields higher, this kind of demand should make USD bonds outperforming against other developed countries' bonds such as Germany, U.K., and Japan, I think.
(4) Fed should continue re-investment in their balance sheet.
→ This is not meaning the change. Rather, we should be cautious about reversal case.
(5) Lastly, increasing pension fund would underpin the demand for global bonds.
→ This seems most reasonable among other rationales.
Let's see the below chart drawing kinds of funds size in OECD countries. In pension funds, the size continues to increase. Although the pace of gain for recent year was similar with mid 2000s, it is close to the faster rather than the slower side. It could offset somewhat sell-off by EMs, but not entirely, maybe.
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| Source : OECD |
And then, let's see this picture. This forecast means possible decline of global savings implying discouraged pension funds since a few years later. Considering this possibility, the environment would be more complex... But, I should think deeper about this further...
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