Bonds were in rally mode this week with the 10-year US Treasury closing at 2.77%, down from a high of 2.95% just a few weeks ago. For now, a 3.00% 10-year Treasury is not a threat. Bonds rallied after another volatile week of trading for various reasons, including: (1) more discussions on tariffs with China and the threat of a trade war, (2) ongoing scrutiny by the public and equity analysts on privacy issues with big technology firms, (3) and a disappointing March jobs report.
The March Jobs Report was a miss, with 103,000 jobs created versus 175,000 expected. However, within the report there were some positives. The two most important factors in the report were a decrease in U6 unemployment from 8.2% to 8%, and the increase in hourly earnings. Keep in mind what we’ve said before: inflation is the archenemy of bonds and wage inflation was a major concern not too long ago.
With the economy at full employment, it is logical to assume that at some point wages will need to increase. The lack of wage inflation has perplexed economists for some time. However, real wage pressure has yet to be confirmed and bonds benefited today from the aforementioned events plus the lack of meaningful increase in wages.
The dip in rates has helped banks price mortgages better late this week. We are cautiously biased toward floating interest rates given the ongoing volatile environment. We are carefully monitoring the 10-year Treasury note and view 2.92% as the line in the sand for higher rates.