J.P.Morgan Dive Into Tsy Vol Surrounding NFPs Ahead Of Independence Day

J.P.Morgan note that away from the NFP number itself, "market structure and liquidity dynamics could impact the Treasury market on Friday, as the BLS release coincides with an early 14:00 close for the bond markets ahead of a 3-day weekend. In the past, our work has shown that Treasury yields are sensitive to payroll surprises, and that these moves can be amplified when employment data are released on holiday-shortened trading sessions. Thus, it's worthwhile to explore how Treasury markets have behaved following payroll releases in different types of trading sessions. We look at the average absolute change in 10-Year yields over various periods around payrolls releases, normalized by the average size of payrolls surprise, comparing all payroll days over the past 14 years with payroll releases on early closes around the July 4th holiday. The data show that in the hour following payrolls releases on early closes around July 4th, Treasury markets appear 1.5-2 times more volatile than observed during a normal session, for a given magnitude of surprise. However, given that a move in yields tends to follow through in the same direction following a surprise on a normal payroll day, some of the outsized volatility realized on a 14:00 close around July 4th tends to reverse by the close. To an extent, liquidity dynamics could contribute to these moves: On average, Treasury market depth tends to be 15-20% lower on releases around July 4th than normal payroll release days. Our colleagues have found in the past Treasury that depth and HFT participation tend to drop off around July 4th, holding around lower levels in the weeks thereafter, and it proves to be most negatively correlated with temperature during summer months. Using this historical data as a guide, Treasury yields could exhibit greater volatility in response to a payrolls surprise, though we would note that the standard deviation of forecasts for Friday's release is smaller than in recent months."