The Curious Case of Levitating Bond Yields
So far this week we have been impressed with the ability of the Treasury market to essentially shrug off a string of strong first-tier reports. While the latest ISM Manufacturing Index set a 37-year high, the March jobs report soared over expectations, and the ISM Services Index hit a new all-time high for March, Treasuries rallied in response rather than move higher in yield. What explains that curious behavior? One can never be certain what is driving the Treasury market at any given time, and it’s usually a variety of factors, but we give it a go in the section below. Finally, in our latest podcast Chris Nichols, Director of Capital Markets for SouthState Bank, sits down with Patrick Sells, head of NYDIG’s Bank Solutions business, and they talk about how community banks should be thinking about bitcoin. It’s an interesting and very timely discussion so do give it a listen. The iTunes link can be found here and the Spotify link here.
The March employment report from last Friday easily beat expectations and yesterday’s Job Openings and Labor Turnover Survey for February was similarly positive about the labor market. As the graph below shows, job openings reached 7.37 million positions, setting a two-year high in the process. The 7.37 million openings easily beat the 6.9 million consensus expectation. The prior month was revised higher as well leaving little doubt about the strength in the jobs market in early 2021.
The other big number in this report is the Quits Rate. It measures those people who voluntarily left their jobs with the expectation of finding other, more desirable work. It’s a measure of worker confidence and in February the rate was 2.3% of total workers and quitters. That rate peaked at 2.4% back in December but the 2.3% to 2.4% range was typical prior to the pandemic so it seems worker confidence in improving their work situation has returned to pre-pandemic levels and that obviously points to continued gains in the labor market in the coming months. The question is, given the solid jobs numbers of late, and the expectation of inflation edging higher, why have Treasuries reacted in such a tame fashion? We attempt to tackle that in the next section.
Despite Strong Labor Market Numbers, Treasury Yields Remain Rangebound
You have to be impressed with how the Treasury market has handled the string of solid economic releases lately and refused to move higher in yield. First, the ISM Manufacturing Index hit a 37-year high for March, then the latest employment report easily beat expectations and added nearly 1 million new jobs. Then, the ISM Services Index on Monday hit an all-time high (dating back to 1997) of 63.7 for March. That report clearly indicated that the services side of the economy was coming on strong in the afterglow of spreading vaccinations and rapid re-openings. Given that slate of information beforehand, most market watchers would have predicted another ramp higher in yields but that has not been the case.
Why yields haven’t marched higher off these reports could mean one of two things: (1) it’s just a pause before they do inevitably head higher, or (2) it could be the market sees this strength as a pulling forward into the first quarter part of the activity that was expected to come along in the second and third quarters. The rapid vaccination rates and re-openings that have followed have been a major impetus behind this rapid labor market strength. But consider this, the latest Atlanta Fed GDPNow forecast for first quarter GDP is 6.03%. The New York Fed has it estimated at 6.2%. The Fed has the full year at 6.5%. If the economy, spurred along during the quarter by two stimulus bills, is expecting around 6% growth what will move it even higher in the quarters that follow? While an infrastructure bill seems inevitable, that will be a longer developing story to the economy and not the adrenaline-like shot from two successive stimulus bills with checks to excited consumers. Perhaps Treasuries are sensing a pulling forward of demand making the first quarter, and perhaps the second, the “as good as it gets” phase of the recovery before the inevitable reversion to the mean? Or, it could be just a pause before heading higher, but it does seem odd for the market to shrug off a string of strong first-tier reports unless it felt that strength would not be repeated.
Agency Indications — FNMA / FHLMC Callable Rates
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