Reflation Trade Gets a Boost From Jobs With Yields Edging Higher

(Bloomberg) — The global reflation trade that’s fueled the biggest Treasury losses in decades got a boost from U.S. jobs data that pointed to a stronger-than-anticipated economic bounceback from the coronavirus pandemic.

While the 10-year Treasury note’s yield climbed as much as 6 basis points to 1.73%, it remained within recent ranges, and the move was relatively muted given how much payrolls growth exceeded the median forecast. Securities in the middle of the maturity spectrum, which are more closely linked to medium-term monetary policy expectations than longer-maturity debt, were among the hardest hit.

“Rates will continue to move higher and should because job creation is coming to fruition as the economic reopening gains speed,” said Robert Daly, director of fixed income for Glenmede Investment Management in Philadelphia. “The 5-year and 7-year sectors are the most vulnerable,” and shorter-maturity yields “should start to move higher as well.”

The relatively contained response may suggest a positive economic story has been largely baked in by bond traders, or that more proof is needed to extend the Treasury selloff. The impact of holiday closures Friday also means a more fulsome reaction could potentially play out next week when markets return in force.

Investors will be looking ahead to policy indications from the Federal Reserve, with minutes of its most recent meeting due to be released Wednesday and Chairman Jerome Powell speaking on Thursday. The week also includes the release of purchasing managers’ indexes for the services sector, a key gauge of how the economy is recovering from the pandemic.

The impact of the most recent fiscal stimulus measures, the progress of the U.S. administration’s multi-trillion dollar infrastructure plans and the sustainability of increased inflation expectations will also be key to whether the Treasury selloff endures or extends.

“I’d characterize it as a knee-jerk reaction to a strong headline number that will probably fade,” said Jim Caron, a bond portfolio manager at Morgan Stanley Investment Management. “It’s baked into the cake that we’re going to get about a million jobs a month for the next several months,” but with total employment still far below pre-pandemic levels, the March results are unlikely to alter the course of monetary policy.

The Treasuries market was open Friday for a shortened session to enable trading around the report, although stocks were shut and markets across most of Europe and the Americas were on hiatus.

With intermediate maturities under the most pressure, the 5-year yield topped 0.95% for the first time since February 2020, helping to flatten slightly the widely watched 5-year to 30-year spread. The 10-year rate remained well below the one-year peak of 1.77% it hit earlier in the week.

Treasury futures volumes surged immediately following the jobs report, although the market took some time to find a firm direction, with the 10-year yield fluctuating between small advances and declines before pushing upward.

The labor-market data showed an increase of 916,000 in U.S. non-farm payrolls, above the average estimate of 660,000. February figures were also revised up, while the unemployment rate dropped to 6%.

What to Watch

Economic calendar:April 5: Markit purchasing managers index for services; ISM services gauge; factory, durable goods and capital goods ordersApril 6: JOLTS job openingsApril 7 MBA mortgage applications; trade balance; Federal Open Market Committee minutes; consumer creditApril 8: Weekly jobless claims; Langer consumer comfort gaugeApril 9: Producer prices index; wholesale inventories and trade salesFed calendar:April 7: Chicago Fed’s Charles Evans; Dallas Fed’s Robert Kaplan; Richmond Fed’s Thomas Barkin; FOMC minutesApril 8: St. Louis Fed’s James Bullard; Fed Chairman Jerome Powell speaks about global economy on IMF panelApril 9: Kaplan appears in two separate Q&A sessionsAuction schedule:April 5: 13-, 26-week billsApril 6: 42-day cash management billApril 8: 4-, 8-week bills

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