The market reaction to the US data on Friday has confused many with both stocks and Bonds bouncing into the close. Overnight the Asian equity markets have continued the positive response which has also carried into the European opening but interestingly – only for equities. The reaction in the bond markets is we have seen US 10’s remain just under the psychological 2% but the spread against German Bunds is where the interest is playing-out. The TY/RX spread has tightened this morning by 4bp to +144bp with US 10’s trading unchanged at 1.995% while Bunds are slightly higher at 0.555%.

Talk between dealers after the US employment report is of the possibility of the Fed return to aggressive QE especially as the market re-prices the possibility of the a 2015 hike to around 8%. That talk has been around in Europe for a while so are we now due for the markets to start to re-price this differential. Government bonds at the front-end are already trading with negative yields as we also see in the interbank market but with banks offering either negligible or zero interest rates on saving/checking accounts banks are saying they do not need money.

Within Europe MR. Draghi has already talked of increasing government bond purchases from 25% to 33% of single issue and in the quasi-sovereign market they already own roughly a third in total which has already been priced in.

In peace times the weapon of war is currency and that has already started to play out with the Emerging Markets. Latin America, with the declining Argentinian Peso and Brazilian Real, is suffering significantly and they are looking to now issue even longer and longer term debt. As syndicate desks began to discuss this in the morning, there has been actually an argument to issue 100 and 150 year bond issues.