The better than expected June 2013 job numbers in the US took up ten year US treasury yields by 20bps. The benchmark ten year US treasury closed last week at levels of 2.73%, the highest level seen since August 2011. US ten year treasury yields are up by around 120bps from lows seen in August 2012.
The US economy added 195,000 jobs in June, which was better than market expectations of 165,000 job additions. May job numbers were revised upwards from 175,000 job additions to 195,000 job additions. Unemployment rate was unchanged month on month at 7.6%. The better than expected job numbers is giving rise to expectations that the US Federal Reserve (Fed) will taper off its USD 85 billion a month bond purchase program in the coming months.
The steady month on month job additions since October 2010 in the US is indicating that the US economy is gaining traction. Rising equity markets with the S&P 500 trading at close to record highs backs the job data. Money is moving away from safe have treasuries to equities and other risk assets on the back of the improvement in economic conditions in the US.
The US Dollar (USD) index strengthened by 1.5% to close at one year highs on the back of the US jobs data The USD gained close to 1.5% against the Euro and the Japanese Yen week on week. The ECB (European Central Bank) has pledged monetary accommodation for however long it takes for the European economy to recover. Europe is facing recession and record unemployment due to austerity measures imposed on indebted sovereign nations such as Spain, Portugal, Italy, Greece and Ireland.
Government bond yields rose week on week as the markets worried about the effect of strong USD on the INR. The ten year benchmark bond, the 7.16% 2013 bond saw yields close up by 6bps at 7.50% levels even as the INR closed just off 0.6% from record lows at Rs 60.35. Government bond yields will be pressured on the back of the rise in US treasury yields and on the back of USD strength.
Credit spreads were flat week on week for ten year benchmark AAA bonds while spreads came off by 12bps for the five year benchmark AAA bonds. Five and ten year benchmark AAA credit spreads closed at 66bps and 93bps respectively. Five year government bond yields rose by 7bps week on week while five year AAA corporate bond yields fell by 5bps leading to falling credit spreads. The credit spread curve will stay steep as the market buys into higher yields at the short end of the corporate bond yield curve.
OIS (Overnight Index swaps) markets saw five year OIS yields rise sharply by 17bps week on week on the back of the market taking out July RBI rate cut bets. Five year OIS yields are likely to trend higher given the sharp rise in US treasury yields.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility) of the RBI eased sharply last week on the back of government spending. Bids for repo averaged Rs 28,000 crores on a daily basis last week against an average of Rs 65,000 crores seen in the week before last. Liquidity is likely to ease further going forward on the back of bank demand for funds coming off as credit growth falters. Credit growth was negative in the April-June 2013 period (as of 16th June).