The U.S. economy likely added back another million jobs in April as the recovery from the pandemic progresses, analysts forecast, but you wouldn’t know it if you looked at the placid bond market.
The U.S. Labor Department is due to report non-farm payrolls and unemployment for April on Friday.
After an initial rise in the first quarter this year, U.S. Treasury yields have remain unruffled by the possibility of a swiftly recovering labor market, even as investors see a string of strong jobs reports as a necessary condition for the Federal Reserve to start the process of pulling the plug on the central bank’s easy-money policies.
The 10-year Treasury note yield
was trading around the 1.60% level on Wednesday, and has struggled to return to its high of 1.78% hit in late March despite a stream of data painting a portrait of an economy going from strength to strength.
In theory, an accelerated recovery should weigh on Treasury prices, and push yields higher, as it kindles uncertainty about how fast inflation may rise and eviscerate the value of a bond’s fixed-interest payments. Yet the opposite has happened, with government bonds resistant to increasingly feverish concerns around inflation.
Part of the answer, some analysts say, is that demand for safe haven investments has grown as more investors become nervous about equities trading at stretched valuations, even if they find the reasons for higher stock prices in recovering earnings.
Long-term government bonds remain an attractive hedge against a selloff in risk assets, said Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments, in e-mailed comments.
Indeed, worries that an over-heating economy, partly prompted by President Joe Biden’s fiscal stimulus plans, might bring forward the Federal Reserve’s schedule for interest-rate hikes kept investors on edge on Tuesday, sending stocks and bond yields lower.
The Nasdaq Composite
dropped 1.9% on Tuesday, for its largest one day decline in around six weeks, while the S&P 500
fell 0.7%. U.S. equities were looking to claw back those losses Wednesday.
“It is conceivable that too sharp an adjustment higher in economic activity sows the seed of its own abrupt end,” said Padhraic Garvey, regional head of research for Americas at ING, though he still saw optimism around the economic reopening as ultimately a driver of higher bond yields.
The reluctance of yields to move higher since the end of March comes as analysts have noted strong demand for government bonds outside of the U.S.
They argue deep-pocketed overseas investors care less about the ups and downs of the U.S. economy and more about the potential for Treasury markets to offer attractive yields, even after accounting for the cost of hedging against foreign-currency fluctuations.
“Long-term bond rates respond to more than the domestic economic environment which, despite another one million jobs in April, is far from normal,” said Bahuguna.