Market commentary: US Job report and the future of bond markets

On Friday investors around the world were focusing their attention on May’s US Non-Farm Payroll Report that beat market expectations, supporting the idea that the first quarter GDP and April’s disappointing data were most likely the result of temporary and seasonal factors rather than the beginning of a widespread economic weakness. 

The US Jobs Report recorded 280,000 new job additions in May, scoring the highest increase since December 2014, and confirming the rebound recorded in April after a very disappointing number recorded in March. Overall, unemployment increased slightly to 5.5% from 5.4%, however this seemed to be largely related to an increasing number of people entering the workforce, including a round of new graduates that started to apply for a jobs after this year’s graduation. 

The participation rate, also increased by 0.1% to 62.9%, recording a four-month high, while the amount of discouraged workers that had stopped looking for a job declined to the lowest level since October 2008.

Friday’s Jobs Report pictured that the US economy is on the right track, shaking off concerns of a potential slow down and indicating that economic activities have begun to pick up pace. The rather positive employment data have not been the only positive news, as positive automobile sales and manufacturing data are also suggesting an overall economic acceleration after a disappointing trend throughout the first four months of the year.

In addition, wages, a key factor taken in consideration by the Federal Reserve in its discussion over a potential hike in interest rates, increased too by 8c in May, with Walmart (the largest US private employer) announcing a pay increase for over 100,000 works, the second since the beginning of the year.

If on one hand the positive Jobs report helped the US dollar rally, gaining 0.83% against the Japanese Yen and 1.50% against the Euro on Friday, on the other hand it put additional down pressure on government bonds which have declined across the board.

The US 10 Years Treasuries’ yield rose to 2.41% at the end of last week, implying a selloff in the asset class and signaling that investors are convinced the recent positive economic data will weight in favor of the FED raising interest rates before the end of the year.

The US 10 Years government bonds are now yielding 40 bps more than the S&P 500 Index’s average dividend yield, reducing investors’ appetite for dividend stocks that, over the last few months, had somewhat replaced bonds as main income generating investments.

In Europe, the selloff of sovereign bonds continued with yields rising across the board from Germany to Portugal to Italy, while the ECB’s QE program is somewhat reducing market liquidity and exacerbating the down move.

In this rather volatile bond environment there are a few unexpected new big players that have join the ranks of the biggest debt buyers: US tech giants. Apple, Microsoft, Oracle and company have started to take advantage of the widespread bond markets’ weakness, by deploying large portions of their half a trillion dollar cash into the debt markets.

The bonds’ holdings of these corporate giants are now rivaling with the largest bond ETFs and mutual funds such as Fidelities and Vanguard, becoming major players able to manipulate the market and steer bond prices by undertaking huge purchases across different bonds classes.

This article was issued by Paolo Zonno, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.