In our earlier post-Non Farm Payroll note we hopped straight onto the observation that benchmark U.S. yields were “shaken but not stirred” in spite of the best employment gain in 15-months. Subsequently, yields have made fresh lows on the day (2.57% on the 10-year) and at last glance were steady at 2.60%. The following chart plots the monthly change in nonfarm payrolls versus the 10-year yield. It shouldn’t be a shocker to anyone that big payroll readings are typically associated with rising bond yields.
Payrolls and 10-year note yields
Of course, investors will quickly point out that it is not the influence of payroll strength that is the catalyst driving bonds today. Rather it is nervous buyers watching with growing concern ahead of the weekend, the bizarre situation continuing to unravel in the Ukraine as Russian officials assert their voice.
Ten-year treasury yields have just made an assault on the weakest level of the year set in early February. Fixed income investors are slowly waking up to the reality that as the Fed steps back from quantitative easing, there are no signs of inflation. Equally, as the labor market improves, there are no signs of wage inflation, which can form the foundation of a wage-price spiral. And even if market reaction to bonds can be blamed on a labor snapback masking an otherwise unhealthy report, the reality should be clear. Interest rates across the yield horizon are likely to remain very low for much longer than most people dare to believe and could decline further. Use distorted Ukrainian politics if you will, but listen to what the market is telling you on a day when payrolls were well ahead of expectations.