Bond Report: 10-year Treasury yield falls below 1.50% to 6-week low despite strong October jobs report


U.S. Treasury yields slumped Friday despite a stronger-than-expected October jobs report, dragging the benchmark 10-year note below 1.50% to end the week at a six-week low.

What did yields do?

The yield on the 10-year Treasury note

fell 7.3 basis points to 1.451%, the lowest finish since Sept. 23, according to Dow Jones Market Data, citing 3 p.m. Eastern levels. The yield fell 10.4 basis points this week, the largest fall since the week ended June 12, 2020.

The 2-year Treasury yield

fell 1.6 basis points to 0.399%. For the week it fell 9.2 basis points, the largest decline since the week ending March 27, 2020.

The 30-year Treasury bond yield

dropped 7.8 basis points to 1.885% and was down 5.6 basis points for the week.

What’s driving the market?

Yields turned down after the Labor Department said the U.S. economy created 531,000 jobs in October. Economists surveyed by The Wall Street Journal had forecast a rise of 450,000. The unemployment rate fell to 4.6% last month from 4.8%. Also, September job gains were raised to 312,000 from a previous estimate of 194,000, while August jobs were raised to 483,000 from 366,000.

However, the number of people who joined the labor force only rose by 104,000 and that left the rate of participation at a paltry 61.6%. Hourly wages jumped again in October and have risen 4.9% in the last 12 months.

Read: Mystery of the missing millions the only blemish on strong U.S. jobs report

Analysts said the move was somewhat confounding, given that the robust payrolls number, lack of improvement in the participation rate, and strong hourly wage growth underlined inflation concerns.

Market watchers said the fall in longer term yields could reflect worries about a Fed “policy error” that could see efforts to engineer a soft landing for the economy amid rising inflation pressures instead lead to an economic downturn.

The Federal Reserve earlier this week delivered a widely expected plan to begin tapering its bond purchases this month. Chairman Jerome Powell said the central bank could remain “patient” about when to raise interest rates.

Powell, who pushed back against rising market expectations for multiple 2022 interest rate increases from the Fed beginning at midyear, also said it was possible the jobs market could improve sufficiently to warrant rate liftoff by the second half of next year.

Inflation data will be in focus next week, with the October producer-price index due on Tuesday and the October consumer-price index on Wednesday.

What are analysts saying?

The magnitude of the buying interest in Treasurys “speaks to a more durable shift in the interpretation of the fundamentals and what’s implied for monetary policy,” said strategists Ian Lyngen and Benjamin Jeffery of BMO Capital Markets, in a note.

“In short, the Fed doesn’t have the best track record of engineering a soft-landing even in the most pedestrian of macroeconomic environments,” they said. “The long-end remains so well bid in large part because the risks of an actual policy error are higher than in prior cycles given the plethora of uncertainties triggered by the health crisis.”

“We don’t expect the fall in the 10-year U.S. Treasury yield to last,” said Nicholas Farr, an economist at Capital Economics, in a note. “In our view, markets are underestimating the likely strength of U.S. inflation in the medium term. Regardless of the timing of the first hike, we also think that the fed-funds rate will ultimately rise much further than is currently discounted in swap markets.”

“With wages and supply chain issues as key risks for the market right now, the inflation report next week will be the key economic point,” said Larry Adam, chief investment officer at Raymond James, in a note. “Any upside surprises to red-hot inflation data could bring more volatility to the front-end of the yield curve, which [has] been under significant pressure with the repricing of rate expectations.”

“The past week shed some light into central banks’ thinking amid growing stagflation fears around the world, and the general message was at least somewhat to the dovish side,” wrote analysts at Danske Bank, in Copenhagen, in a Friday note. “At the same time, market’s inflation fears appear to have moderated slightly, with 5-year/5-year inflation expectation rates falling below 1.9% in Europe and 2.5% in the U.S., providing support to the transitory camp of the inflation discussion.”

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