This morning, bond prices are a touch lower and have shown little response to this morning’s ADP Employment Change index release or the ISM non-manufacturing index. The ADP index came in at -22,000 in January, the best monthly showing in two years. In the coming months, the ADP data will diverge some from the Labor Department’s numbers as the government ramps up Census hiring.
Friday’s payroll report, for which the consensus estimate is a positive 10,000 jobs, will also include the annual benchmark revisions. While those revisions are past adjustments, they are expected to shave 800,000 jobs off of the past year. ISM came in at a print of 50.5 for January, a bit worse than the 51.0 predicted by the market consensus. The latest February quarterly refunding announcement from the Treasury announced that it will auction $81bln in securities, consisting of $40bln in 3yr notes, $25bln in 10yr notes, and $16bln in 30yr bonds. This matches the record sale in November and will refund about $48.3bln of privately held maturities which will drain, not raise, the remaining $32.7bln.
This announcement comes on the heels of Moody’s Investors Service saying Tuesday that unless the U.S. government does a better job of trying to cut its budget deficit, or the economic recovery proves better than expected, it will put in jeopardy the government’s “Aaa” bond rating. Moody’s said that the $3.8 trillion budget presented on Monday, which includes a proposed three year freeze on spending beginning in 2011 on many non-discretionary spending items, fails to stabilize the debt relative to GDP at a level that can be sustained.
It seems somehow strange that the surge in U.S. government borrowing to cover an annual budget deficit was at the same time punctuated by a massive tightening in credit spreads of all kinds. Maybe it has to do with the fact that the government is the monopoly supplier of its own currency…… in other words, the U.S. government cannot default on its debt obligations in the same way that a household or a corporation does. The implication for interest rates is that unless the U.S. can reduce its massive budget deficit, the Treasury will not be able to sell its debt except at very high yields.
We are currently holding steady, down 3 to 4 ticks in the lower coupons. The 10yr is taking a little more heat trading down 10 at a 3.67 yield. Stocks are off 45 points or so. As with any Employment data release, we expect trading to stay around this current range into Friday morning.