A largely in-line data set this morning may serve to further a flattering bias to the bond market. Among a few comments from primary dealers that I work with are indications that:

1. The 5yr area of the curve is exceedingly rich, largely for technical reasons (the on-the-run 5yr issue was tight in repo. this week, also Asian central bank buying).

2. February Fed Funds futures are indicating 5.20%, so there are slight odds of a rate cut 6 months out.

3. the hourly earnings figure (the only area of the report that was weaker than the Bloomberg estimate) provides a slight bias to flattening.

While I generally do not recommend trades, I would like to point out the the 1yr/2yr inversion is ~20bp following the NFP report. I am finding it hard to envision a reasonable set of circumstances that would not cause this relationship to flatten or normalize (on a constant maturity basis) over the next few months.


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