Look at the heatmap above: it shows the 1 minute correlation matrix for the US interest rate futures complex including the first 16 Eurodollar contracts and the Treasury curve. Unlike heatmaps of the stock market, this matrix is smooth from cell to cell: note the beautifully sloping gradient from the front end of the curve (GEH5) to the back (UBH5). No one would blame you for thinking that any market with such an ordered correlation structure must be one of the most efficient in the world.
As the second chart shows, however, the market has a funny way of shattering consensus opinion. Buoyed by the prospect of QE from Europe and stagnant prices at home, US Treasury bonds had begun to enter bubble territory. Short term interest rate traders bid up the price of Eurodollar futures, pushing back their expectations for the date of the first rate increase.
But early this week the bond market began to sell-off and then the Labor Department dealt a terrible blow: reporting excellent jobs data for January and revising the previous months upward. This had an immediate effect on interest rates, pushing yields up across the entire curve:
The effect was especially pronounced in the long end of the curve. The 10 year note had its worst week since 2013 while the 30 year bond yield rose over 25 basis points this week, crossing the 2.5% threshold for the first time since mid-January.
That being said, we hesitate to pronounce bonds dead at this point: the market will be keeping a close eye on Greece after the ECB lifted the Greek debt waiver earlier this week and Moody’s placed the Hellenic Republic’s debt on downgrade watch.
The renewed probability of a confrontation over Greece put pressure on equity markets toward the later half of Friday, and we will be watching the negotiations carefully as Greece approaches its latest funding deadline.