A stronger-than-expected non-farm payrolls report (+257k versus 160k consensus) led to a selloff in US Treasuries. The long end of the curve underperformed in the bear-steepening move, as equities and other risky assets continue their ascent.

Looking forward to next week, Treasury plans to sell $72 billion in new coupon supply for the quarterly refunding, the European Central Bank and Bank of England both conduct policy meetings on Feb 9, the Fed will continue its long-end buyback operations, and the US gets another look at consumer confidence on Friday.

The stock market soared to 6-month highs on an upbeat jobs report and better-than-expected economic data. Equities have rallied for four consecutive weeks as volatility continued to normalize. The S&P 500 rose approximately 2% for the week, while the NASDAQ Composite jumped 3%. Small-cap stocks outperformed large-cap stocks. In terms of style, large-cap growth stocks modestly outperformed large-cap value stocks. The best performing sectors were financials and info tech, while the worst performing sectors were utilities and healthcare. Earnings season is a little more than half way through as 67% of the companies in the S&P 500 index have beaten street estimates. In the headlines this week, much anticipated internet social networking company Facebook filed for its initial public offering. Based on recent private share sales, the company is estimated to be valued around $75-$90 billion.

Investment grade primary activity unexpectedly picked up as several diverse infrequent issuers tapped the market. The recent one way trade continues as most shops stretch for yield. Inventories continue to be depleted and most accounts are worried about selling into any strength only to see it tighter the next day. Notable deals this week included Petrobras ($10.5bln) and IBM ($2.5bln).

Investment grade corporate spreads tightened once again as there has been no particular news out of the sovereign space, especially the Greece PSI deliberations. Primary focus remains on new issuance as most deals continue to be well oversubscribed and trade tighter on the break. The Barclays Credit Index Option-Adjusted Spread (OAS) finished the week at +189, 7 basis points tighter. Financials tightened by 16 basis points (banks -21, insurance -5); industrials tightened by 3 (basic materials -4, capital goods -0, telecom -2, consumer cyclical -4, consumer non-cyclical -2, energy -5); and utilities tightened by 2 basis points.

A slew of favorable economic reports and progress on the European front helped risk assets, including mortgages, outperform Treasuries. Mortgages weathered the back-up in Treasury yields as demand outpaced a pickup in origination and profit taking by money managers. Slightly higher yields offered long-term investors an opportunity to buy pass-throughs just south of record highs. Although economic conditions have improved, Federal Reserve officials are still toying with idea of buying more mortgages to lift the housing market. The market is assigning a fifty-percent probability of another round of asset purchases in the not-to-distant future. In other memorable news, the Obama administration announced another housing relief plan with a focus on the non-agency and good credit borrowers. The plan is more comprehensive (and costly) than existing programs and requires passage by Congress. As expected, the immediate market reaction was negative but prices rebounded once it became clear that Congress was involved. The market is betting that any legislation to support housing is unlikely in election year given the acrimonious political climate. Within the mortgage market, mortgage credit (non-agency and commercial) and conventionals benefited from shifting sentiment away from risk-free assets (US Treasuries and Ginnie Mae mortgages).

For the week, 30-year pass-through spreads narrowed 5 basis points with spreads on FNMA 3.5% mortgages closing at 200 basis points versus the 5-year. According to Freddie Mac, the 30-year mortgage rate fell to an all-time low of 3.87%.

Municipals yields marched lower this week until the nonfarm payroll economic indicator was announced Friday morning, after which most maturities backed up 6-8 basis points in sympathy with Treasuries. Deals were well oversubscribed as continued inflows helped bolster the market. The state of Washington priced its marquee deal, selling a billion in new issue. The market has responded in the past few weeks far more favorably to new issue rather than secondary market offers. Most secondary situations developed with fairly wide bid-ask spreads and traded slowly, reflecting reluctance on both the buy- and the sell-side to trade.

Given Friday’s movements, munis are currently 1-3 basis points tighter on the week, with 10- and 30-year AAA yields at approximately 1.76% and 3.21%. The largest deals of the week included $1 billion Washington State G.Os (Aa1/AA+) and $220 million California Department of Veteran Affairs revenues (Aa3/AA). 10-year bonds came at a 1.90% and 3.00%, respectively.

The global high yield market finished January 2012 in strong form. The Merrill Lynch high yield BB/B index was up 2.55% for the month, with the higher-quality end of the market BB rated bonds (up 2.3%) lagging the higher beta, more volatile CCC rated bonds (up 4.2%), as investors globally went in search of yield. The high yield market during the month benefitted from generally positive global economic data, especially in the US, and the meaningful rally in the equity markets. The more favorable macro-economic environment has resulted in risk assets in general rallying over the past two months. The strong demand for high yield bonds has been met with approximately $23.7 billion in US dollar high yield new issuance. The bonds issued have been from numerous industries, including energy, healthcare and telecommunications. The majority of the new issuance is from US domiciled companies such as Ford Motor and Limited Brands but numerous European companies have also been issuing bonds in the US market, given the strong liquidity in the US dollar high yield market. Prominent European issuers include Germany’s Fresenius AG, the largest global provider of kidney dialysis machines and clinics to Schaeffler AG, a major German auto-parts company which also controls Continental AG, a major tire and industrial parts company. Companies based in such European nations as Poland and Spain were also active issuers in the month. Partially driving the heavy new issuance volume were large inflows into high yield mutual funds, which totaled over $7.0 billion in January.

Stocks in Eastern Europe were up +2.85% during the week. Manufacturing Purchasing Managers' Index (PMI) in Emerging Europe was broadly higher in January. Average PMI increased to 51.1 in January after the December low of 49.9. The improvement was driven by substantial increases in Poland (+3.4% to 52.2, driven by new orders) and Hungary (+1.2% to 49.8, which recovered from end-2011 lows.) This was offset by modest PMI declines in Russia due to lower new export orders to 50.8, Turkey (fell to 51.7), and Czech Republic (-0.4% to 48.8). Overall, today's results were broadly in line with Euro area PMI, which increased by 1.9% to 48.8 in January, and German PMI which jumped by 2.6% to 51.

Having drifted lower in the early part of the week as equity markets sold off and some economic data disappointed, most major government bond market yields ended the week higher, following much stronger US employment and non-manufacturing data. Yield curves were generally steeper as confidence remained that official short-term interest rates would be kept on hold for some time. UK Gilts were hardest hit, with 10-year yields up by 11 basis points on the week, while same-maturity bund yields ended 7 basis points higher. The Japanese bond market ended the week with 10-year yields down slightly, although the market closed before the sell-off in markets elsewhere. Risk appetite improved in the financial markets as signs of a pick-up in global manufacturing activity boosted investor demand for growth assets. Euro-zone and German PMI Manufacturing data was higher on the month. European Union leaders, excluding Britain and the Czech Republic, agreed on a fiscal-discipline treaty that allows for sanctions on high-deficit states and requires members to enact laws to limit budget shortfalls. The talks are still continuing between Greece and its creditors, with an agreement yet to be reached. The Italian, French and Spanish Governments enjoyed successful bond auctions with lower yields, and the peripheral euro-zone government yield spreads over bunds tightened. The Italian market was the top performer, with 10-year yields ending 20 basis points lower having been down by 30 basis points at their low point; Spanish yields ended only 2 basis points higher, thereby outperforming Germany. Ten-year Portuguese yields surged by nearly 200 basis points on Monday to above 16.5%, but then declined sharply to end the week down by 116 basis points at 13.5% following the ECB’s supportive bond purchases.

In the currency markets, US dollar was initially under pressure against most major crosses following the increased demand for higher-yielding assets. However, the US dollar gained some support late in the week from the stronger-than-expected economic data; as a result, the currency ended the week little changed against sterling and the yen, although it remained 0.8% stronger versus the euro having earlier been up by a little over 1%. The commodity-based currencies drew support from encouraging economic data and a rally in commodity prices; the Australian dollar, for example, gained 1% versus the dollar on the week.

Emerging market dollar-pay debt spreads were tighter this week.

The Central Bank of Columbia surprised the market this week by hiking the overnight rate by 25 basis points (bps) to 5%. The hike comes after concerns regarding low interest rates, high economic growth, overheating credit, and domestic demand growth. Central Bank Chief José Dario Uribe also cited high commodity prices and fears of a “greater than anticipated” recession in Europe as further rationale for the hike. In quarter three of 2011, GDP growth came in higher than expected at 7.7% year over year while domestic demand grew at 9.4% over the same period, driven by strong household consumption.

Bank Negara of Malaysia kept its overnight policy rate unchanged for an eighth consecutive month at 3.0%, in line with economists’ expectations. The last policy change came in May, when Bank Negara hiked rates by 25 bps to the current 3.0%. The Monetary Policy Committee stated that it expects the global environment to become more challenging in the near future and that Malaysia’s “growth and inflation prospects will be affected by these external developments.”