Treasury yields initially rose after a stronger-than-expected jobs report Friday, but then turned lower, dragging the benchmark 10-year note below 1.50% as the data was seen doing little to alter the Federal Reserve’s view of the labor market.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.455%
fell to 1.455%, compared with 1.524% at 3 p.m. Eastern on Thursday. Yields and debt prices move in opposite directions. -
The 2-year Treasury yield
TMUBMUSD02Y,
0.394%
was at 0.399%, compared with 0.415% on Thursday afternoon, when the rate saw its largest one-day fall since March 23, 2020. -
The 30-year Treasury bond yield
TMUBMUSD30Y,
1.892%
dropped to 1.881%. It ended at 1.963% late Thursday.
What’s driving the market?
Yields initially rose, but then turned down after the Labor Department said the U.S. economy created 531,000 jobs in October. Economists surveyed by The Wall Street Journal had forecast a rise of 450,000. The unemployment rate fell to 4.6% last month from 4.8%. Also, September job gains were raised to 312,000 from a previous estimate of 194,000, while August jobs were raised to 483,000 from 366,000.
However, the number of people who joined the labor force only rose by 104,000 and that left the rate of participation at a paltry 61.6%. Hourly wages jumped again in October and have risen 4.9% in the last 12 months. Analysts had warned that a failure to boost the labor market participation rate could stoke worries about persistent inflation.
But investors had said it would likely take a report far outside of expectations after the Federal Reserve earlier this week delivered a widely expected plan to begin tapering its bond purchases this month. Chairman Jerome Powell said the central bank could remain “patient” about when to raise interest rates.
Powell, who pushed back against rising market expectations for multiple 2022 interest rate increases from the Fed beginning at midyear, said it was possible the jobs market could improve sufficiently to warrant rate liftoff by the second half of next year.
Inflation data will be in focus next week, with the October producer price index due on Tuesday and the October consumer price index on Wednesday.
What are analysts saying?
“October’s employment report was unequivocally strong and yet 10-year yields fell as low as 1.46% and 30s dropped below 1.90%. Dip-buying and short-covering can only go so far in explaining the rally,” said strategists Ian Lyngen and Benjamin Jeffery of BMO Capital Markets, in a note.
The magnitude of the buying interest in Treasurys “speaks to a more durable shift in the interpretation of the fundamentals and what’s implied for monetary policy,” they wrote. “The phrase ‘policy error’ has received a great deal of airplay in recent weeks as the outperformance of 10s and 30s on an outright basis continues to confound.”
“Although the participation rate has not improved this year, we think it’s too early to give up on it,” wrote economists Aneta Markowska and Thomas Simons at Jefferies. “Labor force dropouts are typically the last ones to get hired, after the more attractive talent with greater attachment to the labor force.”
“The past week shed some light into central banks’ thinking amid growing stagflation fears around the world, and the general message was at least somewhat to the dovish side,” wrote analysts at Danske Bank, in Copenhagen, in a Friday note. “At the same time, market’s inflation fears appear to have moderated slightly, with 5-year/5-year inflation expectation rates falling below 1.9% in Europe and 2.5% in the U.S., providing support to the transitory camp of the inflation discussion.”