This month added another bizarre chapter to the seemingly endless drop in bond yields. The nonfarm payroll report, generally considered the key economic statistic of the month, came in 100,000 above consensus. Bond yields should have soared on the news, since ordinarily investors would interpret it as a sign of a strengthening economy and sell bonds. Instead, the 30-year Treasury bond advanced, pushing yields down to record lows.
In the days following the report, bonds yields rose a bit, but they are still close to historic lows. For history buffs, the yield on the U.S. 10-year Treasury note, currently around 1.50%, is roughly one-tenth of the all-time peak reached in the early 1980s.
What gives? If the economy is getting better, why are yields still stuck near all-time lows?
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The graph above shows the average monthly jobs created in the last five years. While June saw 287,000 non-farm jobs added, this year has only seen 171,500 jobs added per month on average.
While that’s not a bad figure, it could mean that we’ll likely see fewer jobs added going forward. There was an average of 251,300 and 228,700 jobs created per month in 2014 and 2015, respectively. If this trend continues, bond (AGG)(BND) yields could most likely stay low.
Fewer jobs created means that the Fed will probably stay dovish. At the start of the year, the Markets (IWB) (VTI) were expecting two to three rate hikes in 2016. Currently, though, there could be only one hike at best. That’s been a factor in lower rates.
In the rest of the series, we’ll look at more factors that have led to ultra-low yields and why you should expect rates to remain low.