It was no April fool’s joke: US Treasury prices rose significantly this week and yields fell, reversing some of the ground lost in the previous two weeks’ rocky ride.
Just before the Easter break, the Federal Reserve’s concern about inflation and subsequently higher consumer price data had given a bearish tone to Treasuries. Ten-year yields reached 4.69 per cent, a nine-month high.
This week, participants braced themselves for more of the same, but key data towards the end of the week put a spring in their steps.
On Thursday, February’s personal consumption expenditures index – the Fed’s preferred measure of inflation – rose only to 1.6 per cent year-on-year, helping deflate some concerns about rising price pressures.
On Friday, the monthly non-farm payrolls report revealed just 110,000 jobs were created last month – half the number expected by economists. This eased fears that the Fed would begin more aggressively raising rates from its current measured quarter-point increases.
But the bond bears were not silenced. Instead, they pointed to a 0.3 per cent rise in average hourly earnings and a drop in unemployment to 5.2 per cent from 5.4 per cent. That rate is calculated from the household survey, which is separate from the payrolls report. While some economists dismissed the fall as a result of low labour force participation, others warned it needed watching.
“The longer we go without an influx of formerly discouraged workers back into the labour force, the more concerned I will become that the market may be tighter than previously thought,” said Stephen Stanley, economist at RBS Greenwich Capital. “Between these figures and the increase in average hourly earnings, there is enough for diehard bears to cling to, so the debate in the bond market will continue.”
By late afternoon in New York on Friday, the benchmark 10-year note yielded 4.5 per cent, down from 4.6 per cent on Monday. There was less movement in shorter-dated notes, and the two-year yielded 3.78 per cent, from 3.85 per cent.
In the wider market, month- and quarter-end let investors draw a line after March’s turmoil. Leading US bond indices from Lehman Brothers and Merrill Lynch showed last month was the worst for the market since April 2004. Carmakers’ bonds, led by a slump in General Motors, had their worst month in eight years.
