Treasury yields post biggest weekly gain in more than a month after Friday’s jobs report was released

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US Treasury yields posted their biggest weekly gain since June after a monthly Labor Department employment reading showed the United States created 943,000 jobs in July. It was the biggest job increase in nearly a year and a sign that the rebound in the economy may not be hampered by the delta strain of COVID-19.

What do yields do
  • The yield of the 10-year Treasury bill TMUBMUSD10Y,
    1.302%
    rose 7.1 basis points Friday to 1.288%, from 1.217% at 3 p.m. ET on Thursday. It rose 4.9 basis points for the week, the biggest return gain in a week since June 25, according to Dow Jones Market Data.

  • The 30-year bond yield TMUBMUSD30Y,
    1.947%
    climbed 7.1 basis points to 1.933%, from 1.862% a day ago. It rose 3.7 basis points on the week.

  • The 2-year Treasury note TMUBMUSD02Y,
    0.212%,
    meanwhile, yielded 0.208%, against 0.200% Thursday. It rose about 2 basis points on the week.

What drives the market?

U.S. bond markets saw some selloff as investors weighed in on the monthly jobs report for July, which may have increased the outlook for a more hawkish Federal Reserve.

The Department of Labor report for July showed that the United States created a significant number of jobs in July, a sign that the economic recovery has gathered momentum and has withstood the latest assault from the highly contagious delta strain of the coronavirus. The increase in hiring has exceeded estimates. Economists polled by the Wall Street Journal had forecast 845,000 new jobs.

The unemployment rate also fell to a pandemic low of 5.4% from 5.9% in June, beating estimates for a drop to 5.7%.

On top of that, the share of people working or looking for work rose a notch to 61.7% last month. The so-called labor force participation rate has been depressed since last summer, with millions of previously employed Americans still absent from the workplace.

This week, Dallas Fed Chairman Robert Kaplan told Bloomberg News that the central bank should start cutting back on asset purchases as soon as possible. Additionally, Fed Vice Chairman Richard Clarida said the US economy is likely to make enough progress for the central bank to start raising interest rates in early 2023. Clarida a also said he viewed the recent rise in inflation as “transient”, but that the risks of higher inflation outweigh the risks of low inflation.

Investors worried about what appeared to be a slower pace of employment improvement, which threatens to dampen the broader recovery in the United States. A read on private sector employment from the ADP payroll processor on Wednesday indicated that the United States created 330,000 jobs in July, about half of the estimated 653,000.

Until today, long-term bond yields have trended lower in recent months, with the 10-year Treasury yield falling below 1.130% earlier this week, its lowest level in February. But they picked up strongly on Friday after the Labor Department report.

Overall, a general decline in global bond yields has precipitated concerns about a flatter yield curve, raising some concerns in financial markets about what it portends for the economic outlook.

Read: Why investors should care about falling global bond yields and the flattening of the treasury bill curve

What are the analysts saying?
  • Friday’s data “reinforces that the economy is bursting with demand (especially for skilled workers) and is only held back by supply,” said Rick Rieder, BlackRock Inc.’s investment manager for income securities global landlines. “The Fed should go ahead with its reduction program (especially in mortgages) because we already seem to be very close to peak employment and at the same time we risk seeing overheating in some areas.” , said Rieder.

  • The jobs report “took us two steps to further substantial progress,” which the Fed needs to reduce bond purchases, “but the delta variant alone sets us back,” the manager said. Jack McIntyre Portfolio Manager of Brandywine Global Investment Management in Philadelphia. “So it’s two steps forward and one step back, with a reduction announcement likely to come later in 2021 than the market expects,” McIntyre said by phone on Friday. We are positioned lower in bonds and expect yields to rise from here, ”McIntyre said.

  • Bill Merz, head of fixed income at US Bank Wealth Management in Minneapolis, said: “It was a very strong report. And that’s what needed to be seen in terms of a recovery and frankly what many are anticipating and hoping to see in the coming months. What we’ve seen in the last few months in interest rates are the markets saying the Fed won’t be able to increase much and US growth cannot withstand many rate hikes, ”Merz said. by telephone. “A day like today, we are witnessing a turnaround on constructive data. The yield curve steepens due to higher long-term rates and a slightly higher price in terms of how much the Fed can and will increase over the next few years, ”with five interest rate hikes over the next five years starting Friday. . In the coming months, we should have more employment reports that look a lot like today’s, ”Merz said.

  • David Petrosinelli, senior trader at InspereX, said in an email to MarketWatch that the non-farm payroll report “has revealed widespread strength in many sectors of the economy, with significant gains in leisure, l education and employment in government. Coupled with Thursday’s second consecutive drop in jobless claims, report shows job creation accelerates as fall approaches as economy reopens and vaccinations bring more Americans back to market work. The sharper-than-expected drop in the unemployment rate and rising average hourly earnings will likely put pressure on the Fed to signal the start of the cut in the coming weeks, as the economy has clearly made “substantial progress.” In job creation, a prerequisite for reversing the purchase of QE assets.

  • The increase in the non-farm payroll in July shows that the economy “continues to recover and allows the Federal Reserve to continue its plans to be in full housing mode until September and only then begin to consider to start declining, ”Hinesh Patel, London-based portfolio manager Quilter Investors, wrote in a note. “However, these numbers may mask something a little more troubling for the US economy,” Patel said. “The recent increase in delta cases will not be captured by these numbers and, as such, the employment numbers will remain a bit volatile and difficult to interpret. It could even be a highlight for jobs in the United States. United States for a while. Additionally, the Delta variant has shown how vulnerable the global economy is to the emergence of new strains of the virus and the creation of new waves. ”


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