Bond Bulls Validated by Payroll Report: Independent Financial Advice
Today’s Employment Report confirms bond bull view
Today the unemployment rate went down from 8.3% to 8.2% and the number of net new jobs was 120,000. The reason unemployment rate went down was due to discouraged job seekers dropping out of the work force. The 120,000 increase in jobs is roughly equal to the amount needed to keep up with the population increase, so in real terms job growth was zero. This means Treasuries are correctly priced. Today Treasury rates dropped 11 basis points to 2.06% for the ten year bond. The ten year Bond yield is below the midpoint of the range from the October low of 1.78% to the recent high of 2.38%.
Open the doors to new views on bonds
The 12 month trend of 150,000 monthly new jobs is probably the best guess of a smoothed out average gain. The recent months’ gains of 225,000 were very skewed by warm weather and are too much of a short term trend to count on. So if 150,000 is the ‘correct” guesstimate and 120,000 is the hurdle rate for exceeding population growth then the net increase is 30,000 a month or 0.28% a year reduction in unemployment. To go from 8.2% unemployment to 4.0% requires a wait of 15 years. This is like Joseph Stiglitz’s March 12 article in FT.com where he estimated the problem will take 12 more years to fix.
The jobless rate is the key to inflation, fed easing and thus bond yields. An overpriced stock market that eventually crashes will also put downward pressure on interest rates as investors flee stocks and go to bonds.
I wrote an article in March 14 when bonds crashed urging people not get discouraged with bond “Treasury bond prices crash”.
Investors should seek independent financial advice.