Bonds held up well in the face of a very strong jobs report, although interest rates did rise for the week in volatile trading. The muted response by the bond market to the June Jobs Report reminds me of the aphorism “buy the rumor and sell the news”. Bond managers most likely hedged positions ahead of the June job report. The Fed’s Open Market Committee meeting notes were released on Thursday. These notes shined some light on the projected path of short term rate hikes, the Fed’s own view on inflation, as well as how the Fed plans to wind down its enormous balance sheet. Both the U.S. and European Central Banks have opined on the push for higher interest rates as the fear of deflation has subsided. With the German Bund ticking relentlessly higher, it makes it very difficult for U.S. yields to come back down. The German Bund yield sits at nearly two-year highs after the recent breakout. In the absence of a retreat in global yields abroad, it is hard to see much lower rates in the near term domestically.
Jobs Report
The June jobs report was robust with 222,000 new jobs created versus 185,000 expected. The Labor Force Participation Rate ticked up to 62.80%, but still remains at multi-level lows. However, wage inflation remains stubbornly flat and was a tonic for bonds. Inflation is the arch enemy of the bond market, and with no wage inflation one would think this to be the a reason for the lack of higher yields today, given the overall strong report.
We continue to closely watch bonds with an eye toward the ever so important line in the sand of 2.600% on the 10-year Treasury note. Our feeling is that it’s prudent to remain cautious and we are biased towards locking-in interest rates given the positive economic news that we are seeing out of both the U.S. and Europe.
