Treasuries edged lower today after the Bureau of Labor Statistics announced October and November job reports. While this month’s numbers, up 64,000, were better than expected, they couldn’t offset October’s loss of 105,000 jobs, resulting in a net loss of 41,000 jobs and edging the unemployment rate to 4.6%, the highest since September 2021. (1)
The bond market loves this type of soft economic news, as it adds fuel to the fire for the Federal Reserve to continue weighing the cracks in the employment market and possibly continue to lower the Fed Funds Rate.
When the economy slows, the Fed usually pauses or cuts rates to stimulate growth. The Treasury and municipalities will then issue new bonds with lower coupons, making older bonds with higher coupons more attractive.
Also, a slower economy typically means less demand and thus may ease inflationary pressures. Additionally, in uncertain or slowing economic times, investors seek safer assets. Treasuries and investment-grade municipal bonds are considered very safe.
So, when the bond market reacts positively to weak jobs reports or slowing GDP, it anticipates a more favorable interest-rate environment and a safer harbor for capital.
While today’s move was slight, there is still plenty of value in bonds now. For example, the 10-year Treasury is at 4.14%, when you consider 5 years ago to date, the 10-year was trading at .92%, up from .52% on 8/4/20.(2) Prudent investors do not try to time the market; instead they recognize value and capitalize on any pullbacks to secure attractive yields that remain historically favorable.
