The strong February jobs report all but confirms that the Federal Reserve will raise short-term interest rates next week with 235,000 new jobs created versus 188,000 expected. Overall, this was a very good report with the unemployment rate dropping to 4.70%, improved income year over year, and the labor force participation rate rising to 63%, the highest in a year.
All eyes were on the 10-year Treasury note, which closed the week at 2.570% and has been flirting with the critical 2.600% yield threshold that the best and brightest on Wall Street believe to be the line in the sand for higher interest rates. What this means is that should the 10-year Treasury note close above 2.600%, the 30-year bond bull market is over. It certainly feels as if the “animal spirits” have returned with the so-called Trump Bump in equities pushing all asset classes higher at the expense of worsening bond yields.
While we see many indications that interest rates may rise, we are also aware that many government bond yields in Europe and Japan remain in negative territory, which may be keeping domestic interest rates from going much higher. With that in mind, we remain cautious but biased toward floating in interest rates while the 10-year Treasury remains under 2.600%.