While a sharp sell-off surpasses the U.S. bond market, some warn that it may be wise to take profits on short positions ahead of a gloomy Labor Department report in December.
The number of jobs in December could delight the effects of the stock market over the ten-year treasury yield of more than 1% this week. The potential for a disappointing employment outcome as a result of the intensified COVID-19 pandemic may be a reminder that consensus trading of higher long-term yields is a bumpy road ahead.
Read: US economy could lose jobs in December for the first time since the start of the pandemic
“The market has cost a lot of optimism,” Patrick Leary, chief strategist for fixed income for Incapital, said in an interview. “We are seeing the daily hospitalization rate rise, and for many of the country we are in the darkest days.”
Expectations for further fiscal stimulus to combat the impact of the coronavirus pandemic under the incoming Biden government, and a Democratic-controlled Congress, have lifted inflation expectations, along with the yields of bonds.
The yield for ten years on the treasury bond BX: TMUBMUSD10Y was 1.083% on Thursday, the highest level since mid-March and almost 20 basis points higher than where it traded at the end of last week.
Shares also praised the prospect of more fiscal stimulus, with the S&P 500 SPX.
and Dow Jones Industrial Average DJIA,
increased by more than 1% this week.
Leary said he was positioned to sell bond markets through put options on Treasurys that were won in the by-elections in Georgia for the U.S. Senate in the Democrats on Tuesday. Put options are a bet at lower prices, as it gives the holders of the option the right, but not the obligation, to sell the underlying asset at a specific price at a certain date.
See: US bond market could face ‘taper tantrum’ risk after Georgia’s Senate expires, says Jefferies
But the potential for a worse-than-expected job report is leading him to move away from his clumsy attitude now. Leary said he is ready to earn some of his put options.
According to MarketWatch analysts, the Bureau of Labor Statistics will report only 50,000 jobs in December, a month that coincides with the recent resurgence of the coronavirus after pandemic Americans rallied over the holidays and local governments implemented the shutdown to spread the word. to limit the disease.
Recent employment data have raised concerns that the labor market, the foundation of the U.S. economy, stumbled by the end of 2020.
Private sector jobs shrank by 123,000 in December. The latest reading of weekly unemployed claims continues to rise to 787,000. Data on Thursday showed that activities among service enterprises were contracted for the first time in three months.
Sign out: Fed’s Harker sees ‘significant slowdown’ in US economy in first three months of year
To be sure, markets were all too ready to pull up signs of economic distress in favor of the better prospects for later this year when widespread vaccine distribution is expected and a large portion of the U.S. population is vaccinated.
And some argue that a report with poor jobs could boost risk assets and increase returns further if it raises hopes that Washington will pass further fiscal stimulus.
“Markets are now looking at weak data and expecting more fiscal stimulus from a democratically controlled Congress and White House,” Ed Al-Hussainy, senior global and interest rate analyst at Columbia Threadneedle, said in an interview.