Harsh bond market-Locking bias

Mortgage bonds are getting slaughtered this morning following a stronger than anticipated Jobs Report from the Bureau of Labor Statistics (BLS).  According to the report, 295,000 new jobs were created in the US in the month of February.  This was much higher than the 235,000 anticipated by the market, and represented the 12^th month in a row of 200,000+ jobs created in a single month.  Further, the Unemployment Rate unexpectedly fell from 5.7% down to 5.5%.  While the market was anticipating a drop down to 5.6%, the extra 0.1% reflects a significant milestone as we are now at the 5.5% Unemployment Rate the Federal Reserve first used as a benchmark as for when to push interest rates higher.  Although the Fed has since removed 5.5% as a target, we know that it is in line with what the Fed was looking for and will likely influence the timing of a Fed Funds rate increase.

A closer look at the report shows mixed signals.  One contributing factor to why the Unemployment Rate unexpectedly fell is due to fewer people in the workforce.  The Labor Force Participation Rate fell from 62.9% down to 68.8%.  Historically, this is a very low figure and helps make our economy appear stronger as a result.  The massive move higher has certainly allowed many workers to retire early, as well as the massive increase in public long term entitlements is also keeping people out of the workforce.  Further, there was only a 0.1% increase in the average hourly earnings.  This brings the annual growth rate in hourly earnings up to 2%.  This is lower than the Fed would like to see and shows that wage growth inflation is not yet a factor.  However, with many companies now paying lower fuel and energy costs, it is expected that some of the savings will make it into employees’ pockets.  We will have to wait and see the impact this will have.

Bonds are falling fast.  We will continue our locking bias until the bond market shows signs of finding support.  The fall since early February has just been atrocious.  Bonds have broken through all significant layers of support and are now looking to find something to hold on to.  Unfortunately, things will get even uglier before they get better.