Unemployment Hits 17-Year Low
Prior Week Summary
Interest rates were remarkably stable for a week with so many potential catalysts for yield volatility. The long-term flattening trend remains intact, as the yield spread between 2-year and 10-year Treasury Notes fell an additional 2.5 basis points this week to a spread of 0.45%. The nearly 13-year low prompted many articles on the link between the curve and future economic prospects.
The past has shown us that the curve can stay flat for long timeframes, while the economy enjoys positive growth trends. The analysis, typically referenced with respect to historical yield curves and their ability to predict recessions, most often refers to an actual inversion in the spot curve, which has not happened to this point. It is also worthwhile to point out that many economists argue that the information content embedded in the slope of the yield curve is likely to be lower in the current environment than it has been in the past due to the meaningful impact that global central banks have had on asset markets in the wake of the financial crisis. After all, Bloomberg data suggests there is still roughly $8 trillion in global bond market value trading with negative yields.
In economic news, the Fed left rates unchanged while highlighting the committee’s symmetric 2% inflation target in the context of recent increases in core PCE. The market is almost entirely convinced that the Fed will hike an additional 25 basis points next month, with a market implied probability currently greater than 90%.
Separately, The Labor Department reported that the unemployment rate dropped to 3.9%, a 17-year low. The report detailed that the economy added 164,000 jobs in April following a 135,000 increase in March. Despite the tightness in labor markets that a sub 4% unemployment rate suggests, wage inflation remains relatively muted, with average hourly earnings only rising 0.1% in April on an unchanged 34.5-hour work week.
Lastly, the Treasury Department guided the market to expect increases in bond auction sizes again this quarter to accommodate our growing deficits. The report also announced the introduction of a new 2-month Treasury bill.
The Look Forward
The big event on the horizon this week is the highly anticipated launch of exchanged traded SOFR futures. We will be monitoring developments in this market very closely, and will keep our clients up-to-date as the situation unfolds.
Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Source: Chatham Financial
Fixed Income Snapshot
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