Baker Market Update – wk211105

If you were to ask anyone what would happen to bond yields if it was reported in a single week that the stock market hit another record high, the economy added more than 500,000 jobs and the Federal Reserve announced they would immediately begin buying $15 billion fewer bonds a month, they would almost surely say yields would spike higher. And yet those three things all happened this week and yields fell 0-7bp across the curve with the largest declines coming in the belly of the curve.

The most anticipated news of the week was the Federal Reserve’s announcement Tuesday that they would begin to taper their asset purchases this month and buy $10b fewer Treasuries each month and $5b fewer Agency MBS. If they maintain that pace of tapering, the Fed should complete its fourth round of quantitative easing in June 2022 with a balance sheet close to $9 trillion. Chairman Powell has done a much better job communicating the impending taper than Chairman Bernanke did back in 2013 when he spooked the markets and caused the 10yr yield to nearly double in 4 months. Markets were well prepared for this announcement and both Treasury yields and MBS prices barely reacted to the news.

The second most important news of the week was Friday’s jobs report that showed the economy added 531,000 jobs in October, the fastest pace in 3 months and more than double the originally reported 194k reported last month (revised higher to 312k). Job gains were led by leisure and hospitality (+164k), but there was broad based strength in business services (+100k), manufacturing (+60k) and transportation (+54k), indicating some of the pandemic related constraints on the economy may be easing. The Unemployment Rate also fell a larger than expected 0.2% to 4.6% and the Labor Force Participation Rate unexpectedly fell to 61.6% as the stronger jobs market seems to have done little to bring idle workers back into the labor force.

While all this positive economic news should have sent bond yields higher, just the opposite happened. The markets were already digesting the news that the Bank of England did not raise rates as expected Thursday but instead left rates at record lows. UK bond yields had risen noticeably in anticipation of that rate hike and quickly reversed course when it did not happen. US bond markets seem to have taken notice and may be questioning the 30bp rise in the 2yr yield over the last month. Markets are now less optimistic about an early Fed liftoff than before and continue to price in a Fed Funds rate around 1.25% in 2025, about half of what the Fed’s most recent “dot plot” shows (see image below).

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The Baker Group's Ryan Hayhurst

Ryan W. Hayhurst

Manager/Financial Strategies Group
Managing Director/The Baker Group LP

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