Yields began the week on a down note after Greece unexpectedly announced that they would hold a public referendum about future austerity. The general consensus among economists that we talked to was that the public would vote 'yes' on austerity, which directly implies that Greece would remain in the eurozone. Yields gradually lifted throughout the week as the flight to quality dissipated, and the 10-year Treasury yield returned to levels seen in the middle of the previous week.
For the second week in a row, however, unexpected news from Greece has made this report obsolete.
The Greek public voted with a resounding 'no' to the creditors' demand. Greece's continued participation in the euro immediately became cloudy. Bond holders rushed back to quality, and yields gave back all of their gains.
|Fed Fund Futures Rate Prediction
||Jan. 2016 (57.0%)
||Dec. 2015 (57.0%)
|10yr Treasury - 2yr Treasury
|| -1 bps
|High Yield - 10yr Treasury
|Corp A - 10 yr Treasury
|10 yr Bund - 10 yr Treasury
|5yr, 5yr Forward Inflation Breakeven
The announcement of the public referendum had an immediate impact on Treasury yields. The 10-year Treasury dropped 16 basis points (bps) on Monday, June 29 from its June 26 close. Yields on the 2-year Treasury declined 8 bps. As reports came in that a 'yes' response was the most likely outcome, yields rose back toward previous week levels.
A disappointing employment report put a halt to those increases.
On the surface the report looked alright. The unemployment rate dropped more than expected and payrolls were in-line with the Briefing.com Consensus.
Yet, underneath the headline, the employment sector was not nearly as strong as once thought.
The entire decline in the unemployment report was the result of people leaving the labor market and not from gains in employment. This was another sign that the unemployment rate is biased and not a good measure of actual employment conditions.
Meanwhile, despite having a record number of job openings, hourly wages were flat and aggregate earnings increased only minimally in June. There are no demand-push inflationary pressures, which reduces the likelihood of inflation growth meeting the Fed's target rate in the intermediate term.
The futures market responded to the poor employment report by pushing back its prediction of the timing of the first rate hike from December 2015 to January 2016. Yields across the curve pulled back tandem, which kept the 2-year/10-year Treasury spread relatively constant.
Investment-grade corporate yields moved in-line with Treasury yields, and the risk-premium remained relatively steady.
Concerns about global economic conditions drove yields on high-yield debt up 22 bps by midweek, before coming in slightly by Friday's close. The spread-to-Treasuries increased 26 bps to 449 bps. The premium hasn't been above 450 bps for an extended period of time since April.
Expectations of a 'yes' vote in the Greek referendum helped push yields back to where they were prior to the referendum announcement.
The five-year, five-year forward inflation breakeven was flat despite the poor wage growth data in the June employment report.