Government bonds have gone
wild!
Sure, you might expect
high-yield bonds to act unpredictably from time to time. That’s why they’re
high-yield bonds. They don’t receive investment-grade ratings – BBB through AAA
– from leading credit rating agencies because they’re not considered to be as
creditworthy as investment grade bonds and carry a high degree of risk.
U.S. Treasuries are a
different story. They are backed by the full faith and credit of the U.S.
government which can raise taxes to cover its debts. Treasuries are considered
by many to be one of the safest investments around. As a result, they’re usually
pretty stable and stodgy.
That wasn’t the case last
week, though. The U.S. Treasury chased after its cousin, the Bund, which is
issued by the German government. The Bund has been on a tear recently. Experts
cited by Bloomberg.com reported a
shift in sentiment and fundamentals may have triggered European bond behavior
that “helped wipe $436 billion off the global fixed-income market in the past
week.”
The performance of German
bonds reverberated around the world, according to Bloomberg.com, affecting U.S., French, Spanish, Japanese,
Australian, Polish, and Italian government bond performance. Bond prices fell
as yields rose higher. Barron’s reported:
“Seasoned observers must
have been shaking their heads. Not only do high-grade government bonds not
normally gyrate more than a few basis points in a day, those swings typically
don’t move across oceans like tsunamis.”
Since February, U.S. Treasury
yields have risen from a low of 1.67 percent without any significant change in
fundamentals, according to Barron’s.
It could be that U.S. markets think the Federal Reserve rate hike will occur
sooner rather than later. Last week, Chairwoman Janet Yellen voiced the opinion
that stock market valuations were, generally, pretty high. That could indicate
the Fed is ready to act.
Be prepared for a volatile
ride until the uncertainty driving markets begins to settle.
reading the unemployment tea leaves. Americans have long relied
on unemployment statistics to provide insights to our country’s economic
health. The Richmond Federal Reserve
defined full employment as “the level of employment at which virtually anyone
who wants to work can find employment at the prevailing wage.” Interestingly,
full employment is not zero unemployment because jobs are being created and
eliminated constantly.
Many analysts have been
asking what full employment is today, in part, because the Federal Reserve has
said it will begin raising short-term interest rates when the economy is
nearing full employment (and inflation is about two percent). It may turn out
to be a trick question. The Economist wrote:
“Although the number of
jobless Americans has fallen, the share of the working-age population in the
labor force has also dropped considerably, from 66 percent before the financial
crisis to less than 63 percent now. Temporary factors have affected the
statistics, but much of the change has been driven by structural factors such
as retirement of the baby-boomer generation and rising college enrollment.
These developments may explain why, as the unemployment rate has fallen from 10
percent in 2009 to 5.4 percent today, the Fed’s target long-run unemployment
rate has also declined, from 6 percent in 2013 to just 5.2 percent at present.”
On Friday, the Labor
Department announced the unemployment rate was 5.4 percent. However, there is
some skepticism about whether the American labor market really is close to full
capacity. Experts cited by The Economist
suggest a stronger jobs market might coax more people into the workplace. By
their estimates, America’s true unemployment rate is about 6.6 percent.
The Economist suggested labor market slack is one reason
average hourly earnings have remained sluggish. Many thought low oil prices
would push consumer spending higher. They did not. It looks like bad weather
and stagnant wages may be behind lethargic economic growth.
Weekly Focus – Think About It
“Your work is
going to fill a large part of your life, and the only way to be truly satisfied
is to do what you believe is great work. And the only way to do great work is
to love what you do.”
--Steve
Jobs, Co-founder, CEO, and Chairman of Apple Inc.
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