It's stocks that matter most in jobs week for bond traders

New York

THE US jobs report was already playing second fiddle to inflation data in the minds of bond traders. But after last week's turbulence in technology stocks, it almost feels like an afterthought. Benchmark 10-year Treasuries are coming off their biggest rally of 2018, with yields at seven-week lows. This time, it wasn't geopolitical risk fuelling the gains, or even weak inflation figures (the Federal Reserve's preferred gauge, in fact, beat analysts' estimates). Rather, it was investors seeking refuge from the volatility in equity-market darlings such as Amazon.com Inc, Facebook Inc and Tesla Inc.

That dynamic looks unlikely to change in the coming days, even though the latest update on the US labour market looms at week's end. Of course, part of why payrolls have lost some of their oomph is because they've been strong for so long. March looks to be no different: Employers probably added 189,000 workers, around the average for the past year.

With that steady jobs market in mind, the start of April gives traders a chance to assess the Treasuries market after its most punishing quarter since 2016. Bond bulls have ample cause for hope: Yield curves are the flattest in a decade, and that 3 per cent mark on the 10-year yield is just getting further and further away.

"What has reset the levels here is the persistence of equity volatility," Greg Peters, senior portfolio manager at PGIM Fixed Income, said in a Bloomberg TV interview. It's "had a slow bleed into the rate market". The 10-year yield fell seven basis points last week to 2.74 per cent, declining through a key resistance level that held for weeks. The 30-year yield closed below 3 per cent for the first time since January. Meanwhile, shorter maturities were little changed, leaving the yield curve from two to 30 years at the flattest since 2007. Two-year notes remain locked in place because expectations for rate hikes have barely budged - fed funds futures are still pricing in about two more increases for this year.

"There's a lot of selling pressure that's going on at the short end that could continue to weigh on the markets and push short rates higher," said Kathleen Gaffney, a fixed-income money manager at Eaton Vance Management. "You could see an inverted curve simply because of the technicals." There are a couple of bright spots for the short end. For one thing, the deluge of supply is finally starting to ease. The Treasury's auctions of three and six-month bills this week will each be US$3 billion smaller, after swelling to records in recent weeks. And the London interbank offered rate has started to climb at a slower pace.

But for the time being, it's the spectre of market volatility that appears to be the main driver for rates. The S&P 500 Index is coming off its first quarterly loss since 2015. Whether that's seen as a healthy correction or the start of something bigger is likely a key to the path of Treasuries from here. That means for the second year in a row, predicting the start of a bond bear market is looking like a fool's errand.

"We thought this year was different, that there was enough momentum," said Kevin Giddis, head of fixed-income capital markets at Raymond James. But with "an administration that is so unpredictable, a potential trade war, and now a fallout in the equity market", things aren't so clear, he said. BLOOMBERG