The December nonfarm payroll report that was released Friday, January 6th, showed an unexpected increase of 200,000 jobs and a drop in the unemployment rate to 8.5 percent, the lowest level since 2009. Normally, this kind of good economic news would push rates up as bondholders sold their positions. Yet, this was not how things worked out on Friday, when rates went lower on the announcement.
We pin this odd outcome on two causes: First, the market came to the conclusion that the employment figures, while showing improvement, were not cause for celebration. After all, the U.S. economy needs to produce about 250,000 new jobs each month to keep up with population growth, and economists put full employment at somewhere between 4 and 6 percent.
A flight to quality may be a second reason why rates moved lower on the news. With the sovereign debt crisis moving into its 20th month and no real end in sight, many investors are moving their maturing Italian, Spanish, and other troubled European debt into U.S. Treasuries.
All of this means we can look for the rate on the 10-year to stay below 2.30 percent, and possibly even drop as low as 1.70 percent during the first quarter.
Written by William E. Jones, Jr.