Once a month the government publishes the employment situation, also known as the “employment report”. No other economic data is so consistently relevant for the bond market and thus for interest rates.
For most of the past year, the normal correlation between jobs and rates has been put on hold. That makes sense, of course. Initial locks complete extinguished the job market and we waited to see how it would recover and how it would reshape since then.
In the past 1-2 months, the bond market has finally shown some willingness to respond to economic reports. The last month in particular is exceptional strong Job numbers obviously up Pressure on prices. For this reason, the anticipation for this week’s report was high.
Indeed there was very big response. Economists expected the economy to create nearly 1 million jobs, but the real number was only 266,000! This makes it one of the biggest mistakes in the history of this report.
Bond yields did the logical thing and immediately moved lower, but paradoxically withdrew almost as quickly. On the way back from the lowest levels in months, there are 10-year returns tries to recover but encountered resistance at 1.53% – the same floor that refused rally attempts several times in mid-April.
The game after game in the last paragraph is confusing. So how about a chart ?! The blue line shows the intraday movement of 10 year earnings. The big vertical decline coincides exactly at 8:30 a.m. ET when the report was released.
If you zoom out a bit, you’ll see the context for 1.53 (NOTE: The line in the table below Not drop below 1.53 as this is a HOURLY chart and returns were back above 1.53 at 9 a.m. ET.
When looking at the table above a positive Counterpoint would be the fact that most of the week was spent on lower returns. The news is even better for mortgage rates, which outperformed their Treasury benchmarks (10-year returns and mortgage rates usually move in relative lock-step).
It has been doing this for more than a month as mortgage rates fell to their lowest level since late February.
While this could look Like a major departure from mortgage rates, the following graph provides more context. However, the only important aspect is that The correlation has largely been restored After a complete collapse in 2020, mortgage rates will have a hard time deviating too much from government bonds.
There are some esoteric reasons for the recent divergence. These include, for example, unprecedented outperformance by mortgage-backed bonds, the changing shape of the yield curve and the gradual tightening of mortgage lenders’ margins.
In simpler terms, we can also assume that government bonds face some bigger challenges these days than mortgage bonds. Friday provided a good example of this as administrators quickly drew on employment data to prove that the economy still needs support.
Why should that be important for Treasuries? In general, even more so tax assistance The more the economy needs, the more government bonds need to be issued. Higher treasury issues mean more treasury deliver which in turn leads to higher yields– All other things are the same.
This is Not to say the markets saw it that way. Indeed, many market participants have simply ignored the number of jobs as an outlier in an economic recovery that will continue to produce noisy data. Indeed, this week’s other high profile data painted a brighter picture. In the labor market, weekly unemployment claims reached one post-pandemic low.
In relation to broader economic indicators, the Institute for Procurement Management (ISM) published its indices, which map the manufacturing and service sectors. While both fell slightly from last month, they landed at levels that are still exceptionally strong.
The main focus for next week for interest rates will be on a new round of Treasury auctions. Dollar amounts will be the highest ever. These auctions are an important measure of investor appetite for bonds. Weak demand would mean interest rates would have to rise to attract more buyers.