JPMorgan Sees Rates-Market Peril as Jobs Data, Holiday Converge

(Bloomberg) -- The U.S. rates market is more dangerous than usual when the June employment report is released in a shortened session before the July 4 holiday, as is the case on Friday, according to an analysis by JPMorgan Chase & Co. strategists.

Yield moves “can be amplified when employment data are released on holiday-shortened trading sessions,” the strategists say in a report. They found that in the 60 minutes beginning at 8:30 a.m. New York time, the Treasury market is 1.5 to 2 times more volatile than on a normal jobs-report release day. Much of the “outsized volatility” has faded by the end of the trading day, however.

The June employment report is slated to be released Friday at 8:30 a.m., and Sifma has recommended a 2 p.m. close of trading for U.S. fixed income along with a full close on Monday, July 5.

Relatively muted participation by high-frequency trading accounts may explain the pattern, the JPMorgan strategists say. Treasury market depth, as measured by the combined size of the top three bids and offers on the BrokerTec platform, has been 15% to 20% lower than on normal employment report days, they found.

The currency market also appears to expect low liquidity. Overnight options in dollar-yen are trading near levels seen around the Fed's March meeting, with one-week risk reversals in demand, traders say.

Rates traders have additional reason to sit this one out; many expect that the Federal Reserve will take steps toward tapering its bond purchase program at its annual Jackson Hole symposium in August. Treasury futures volumes through 12 p.m. New York time on Thursday were about 80% of the 20-day average.

This week's main theme has been heavy activity in eurodollar futures spreads, especially the December 2022 to December 2024 pair, where volume is approaching 100,000. The wagers appear balanced between a steeper curve and a flatter one, creating the potential for the jobs report to cause a burst of trading.