The unusual combination on Friday of the Good Friday holiday, a potentially crucial jobs report and a truncated trading session could complicate the work of bond traders, even into next week.
The bond market will remain open on Friday for a truncated trading session in observance of the holiday, even as European exchanges and a vast swath of U.S. market will remain shuttered. But Friday also will coincide with what some have billed as a blockbuster employment report, which could show new job gains north of a million in March.
This combination of holiday-reduced liquidity and the potential for the biggest job gains of the pandemic, since early fall, has sparked some trepidation among market participants.
“If we have an upside surprise, will the Treasury market trade off more than it usually does?” said Kent Engelke, chief economic strategist at Capitol Securities Management.
Back in 1994, that’s precisely what happened, the jobs report came in stronger than anticipated and the Treasury market lurched. Like now, the bond market was closed early and equity markets was shuttered due to the Good Friday holiday.
“It was a week after I first started managing a fixed income department, and it was before cell phones. I was on the golf course,” Engelke told MarketWatch. “The jobs report came in stronger than anticipated. Then on Monday, the market sold off fairly dramatically.”
Adding to the mix, government bonds traded on Thursday will change hands next Monday, and bonds traded on Friday would change hands next Tuesday, said Steve Feiss, head of fixed income at Etico Partners. “That’s a risk for the buyer and the dealer.”
Most times, Treasurys tend to settle the following day after being traded. On a practical level, that means bonds move from the seller’s account to the buyer’s account a day after a transaction has been agreed.
Market participants also expect thin holiday trading on the eve of the job report, a vital piece of economic data.
“It is a bit of an unusual period. Typically, at times like this you would have guys deviating towards safety as opposed to risk,” Padhraic Garvey, regional head of research for the Americas at ING, told MarketWatch.
Garvey also thinks investors buying bonds to shelter from thin liquidity and volatility could be making a dangerous mistake, as they risk be hit by an impressive payroll report on Friday, which could precipitate a wave of selling in Treasurys.
The 10-year Treasury note yield
stood at 1.68% on Thursday, after trading at a 14-month high of 1.77% earlier in the week. Bond prices move inversely to yields.
While the average forecast is for 675,000 monthly jobs gain, a growing number of analysts are raising the possibility that the Labor Department could report the U.S. economy has added over 1 million jobs in March.
Such a number would underline the U.S.’s impressive economic momentum, aided by fiscal stimulus funds and vaccination efforts.
“The lofty expectations brought into the March employment data have laid the groundwork for a potentially sizable market reaction,” wrote Ben Jeffry, a rates strategist at BMO Capital Markets.
-Joy Wiltermuth contributed reporting