{"id":48080,"date":"2018-10-09T08:00:13","date_gmt":"2018-10-09T12:00:13","guid":{"rendered":"https:\/\/www.ino.com\/blog\/?p=48080"},"modified":"2018-10-08T22:51:28","modified_gmt":"2018-10-09T02:51:28","slug":"onward-and-upward","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2018\/10\/onward-and-upward\/","title":{"rendered":"Onward And Upward"},"content":{"rendered":"

Apparently, the bond market just got the email that the U.S. economy is smoking and that interest rates are going up.<\/p>\n

The yield on the benchmark 10-year Treasury note jumped 17 basis points last week to close at 3.23%, its highest level since March 2011. The yield on the 30-year bond, the longest maturity in the government portfolio, closed at 3.41%, up an even 20 bps.<\/p>\n

The pertinent questions are, what took so long to get there, and where are yields headed next?<\/p>\n

Analysts and traders pointed to the Institute for Supply Management\u2019s nonmanufacturing index, which rose another three points in September to a new record high of 61.6. The group\u2019s manufacturing barometer, which covers a smaller slice of the economy, fell 1.5 points to 59.8, but that was coming off August\u2019s 14-year high.<\/p>\n

Bond yields jumped further after the ADP national employment report showed private payrolls growing by 67,000 in September to 230,000, about 50,000 more than forecast. It turns out the ADP report didn\u2019t precursor the Labor Department\u2019s September employment report, but it was still pretty strong. Nonfarm payrolls grew weaker than expected 134,000, less than half of August\u2019s total of 270,000, but that number was upwardly revised sharply from the original count of 201,000, while the July total was also raised to 165,000. The relatively low September figure was blamed not on a weakening economy but on the fact that employers are having trouble finding workers. Meanwhile, the unemployment rate fell to 3.7% from 3.9%, the lowest rate since December 1969.<\/p>\n

Indeed, last week\u2019s jobs report only confirmed what has been going on for a while. The Fed\u2019s most recent Beige Book, covering mostly July and August, described the labor market throughout the country as \u201ctight,\u201d<\/em> with most districts reporting \u201cwidespread shortages.\u201d<\/em> Indeed, half of the Fed\u2019s 12 districts said: \u201clabor shortages were constraining sales or delaying projects.\u201d <\/em><\/p>\n

Meanwhile, weekly unemployment claims are continuing to run at their lowest levels since 1969. Amazon\u2019s announcement that it would raise its minimum wage to $15 an hour, more than double the federal minimum, was to some degree a public relations move to get the government off its back, but it was another indication of how tight the American jobs market is.<\/p>\n

So why was this such a surprise to the bond market last week? Why have yields suddenly shot up? Normally, the bond market is ahead of the curve in knowing where the economy is headed next, but this time it seems to be a lagging indicator.<\/p>\n

Indeed, if the economy and jobs numbers continue to roar ahead, bond yields have some further catching up to do. Right now, the U.S. economy is growing at 4%, so that seems like the likely next step for long-term bond yields. It also may be indicating that the Fed needs to be a little more aggressive in tightening monetary policy and raising short-term rates.<\/p>\n

While Fed Chair Jerome Powell last week was reiterating the Fed\u2019s intention to raise rates gradually \u2013 a little too gradually in light of the economy\u2019s strength \u2013 at least one Fed member was arguing for a more aggressive posture.<\/p>\n

\u201cI believe that Federal Reserve policymakers will likely need to move interest rates gradually from a mildly accommodative stance to a mildly restrictive stance in order to best fulfill our mandate \u2013 stable prices and maximum sustainable growth,\u201d<\/em> said Eric Rosengren, the president of the Boston Fed. \u201cI am carefully watching factors that could pose risks to the continued U.S. economic expansion. But my own assessment is that the most likely outcome will be a U.S. labor market that continues to tighten,\u201d meaning a \u201clikely buildup of economic imbalances, including, but not limited to, inflationary pressures.\u201d<\/em><\/p>\n

Granted, Rosengren currently doesn\u2019t have a vote on the Fed\u2019s rate-setting monetary policy committee, but it would be surprising if there aren\u2019t others who do have a vote can also read the economic reports.<\/p>\n

Rising bond yields certainly aren\u2019t good news for the housing business, which is historically a driver of the U.S. economy but the past few years has been one of the biggest laggards due to high home prices and a millennial buyer group that doesn\u2019t seem overly enthusiastic \u2013 or creditworthy enough \u2013 about homeownership as previous generations. <\/p>\n

Last week the average rate on a 30-year mortgage held steady at about 4.70%, its highest level in more than seven years \u2013 yes, you guessed it, the last time the 10-year yield hit its current level. Assuming 30-year mortgage rates are priced 150 basis points over the 10-year yield, that would push mortgage rates to 5.5% if the benchmark Treasury hits 4.0% \u2013 and lots more prospective buyers out of the market.<\/p>\n

But there might be one silver lining. A 4% government-guaranteed bond yield looks mighty attractive compared to stocks, where the average dividend yield on the frothy S&P 500 is about half that. A correction in equities would be a healthy thing if the bull is going to keep running.<\/p>\n

Visit back to read my next article! <\/p>\n

George Yacik<\/a>
\nINO.com Contributor - Fed & Interest Rates<\/p>\n

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Apparently, the bond market just got the email that the U.S. economy is smoking and that interest rates are going up. The yield on the benchmark 10-year Treasury note jumped 17 basis points last week to close at 3.23%, its highest level since March 2011. The yield on the 30-year bond, the longest maturity in […]<\/p>\n","protected":false},"author":16,"featured_media":48082,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[8483,8655,6824,9493,6938,1750,7787,9494,5745,5442],"class_list":["post-48080","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ino-com-contributors","tag-10-year-treasury-note","tag-bond-yields","tag-federal-open-market-committee-fomc","tag-federal-reserve-chair-jerome-powell","tag-george-yacik","tag-inflation","tag-interest-rate-hikes","tag-low-inflation","tag-monetary-policy","tag-the-federal-reserve"],"yoast_head":"\nOnward And Upward - INO.com Trader's Blog<\/title>\n<meta name=\"description\" content=\"The yield on the benchmark 10-year Treasury note jumped 17 basis points last week to close at 3.23%, its highest level since March 2011.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/wwwtest.ino.com\/blog\/2018\/10\/onward-and-upward\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Onward And Upward - 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