U.S. Bond Traders May Want to Rethink Taking the Day Off Friday

(Bloomberg) -- U.S. bond traders who are planning to finish up for the week after Wednesday's early close should take note that the last time the monthly jobs report landed on July 5, it produced an almost quarter-point jump in 10-year Treasury yields.

On the day after U.S. Independence Day in 2013, the 10-year yield closed 23.6 basis points higher, as the headline jobs print beat expectations by 29,000 and the prior month was revised higher by 49,000. Yields climbed to 2.74% from 2.50% over the session. The initial move on the data generated an 11 basis-point spike before yields cheapened further into the close.

Those holding curve positions may want to take a rain check on tee times or earlier departures to the Hamptons. The spread between 2- and 10-year yields widened more than 20 basis points on July 5, 2013, as losses were led by the intermediates over the front end.

This time around, the payrolls report is expected to show that the pace of hiring picked up to 164,000 in June from a disappointing 75,000 in May. Traders will be looking for the data to confirm or refute concerns about the health of the U.S. economy as they assess the chances that the Federal Reserve will cut interest rates at the end of this month. With the bond market shut Thursday, they'll have to resist the temptation of a long weekend.

The potential fireworks on Friday come as the 10-year yield trades near its lowest since 2016 following two days of gains for Treasuries, with yields around 1.965% as of 8:40am Wednesday in New York.

The rally that started Tuesday -- initially fueled by wider gains across gilts -- was based on futures volumes at well-below usual levels, showing the impact of low liquidity. The advance was extended through key futures levels as the 10-year yield fell below 2%.

Preliminary CME Group open interest data show that Tuesday's gains were largely driven by traders covering short positions, in a sign that positions are being pared into the jobs report. The data show the amount of outstanding risk in cash terms dropped by $5 million per basis point move in the 10-year contract.

--With assistance from Emily Barrett.

To contact the reporter on this story: Edward Bolingbroke in New York at ebolingbrok1@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Greg Chang, Mark Tannenbaum

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