By Sunny Oh
If the July jobs report on Friday realizes the worst fears of Wall Street, it could ring the death knell for the few bond bears left in the Treasurys market.
Traders insist another shock to the labor market could inspire a further rally in haven debt, even with yields for government bonds already near their record lows. Fresh signs that the U.S. employment is taking a longer time to recover than hoped, traders argue, could add to growing economic pessimism, as COVID-19 cases rise across the country and lawmakers tussle in Congress over another fiscal stimulus package, triggering yet another flight to safetly among investors.
“If it is a disappointing number, you could see us a break lower on the 10-year Treasury yield. It would definitely suggest something more serious is up with global markets,” said Patrick Leary, chief market strategist at Incapital, in an interview.
The 10-year Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y 0.00% was trading at 0.53% Thursday, a few basis points away from its all-time closing low of 0.501% set in early March. Bond prices move inversely to yields.
Traders say pushing below this key psychological level could presage further declines in the benchmark rate.
“Friday’s jobs data could be the nail in the coffin for higher rates,” said Leary.
And investors, on the whole, are expecting a much more muted monthly jobs gain in July. MarketWatch-polled analysts are penciling in another addition of 1.7 million jobs to the labor market, on top of June’s 4.8 million increase.
“I’m expecting a weaker payrolls number. I don’t know anyone who feels differently,” Jim Caron, senior portfolio manager at Morgan Stanley Investment Management, told MarketWatch.
It’s not clear, however, if economic data has mattered much to the trajectory of the bond market so far, with the Federal Reserve effectively keeping longer-term rates under control.
Treasury yields already shrugged off the stronger-than-expected purchasing managers indexes from the U.S. manufacturing and services sector for July, even though it showed the U.S. recovery was making fitful progress.
Part of that reflects the labor market’s importance to the U.S. Without the spending power of American households, it would be hard to imagine the U.S.’s consumer-dependent economy returning to normal, traders said.
So what does this mean for broader markets?
For Leary, the consequence of a weaker employment report actually could buoy stocks if it leads investors to pencil in increased expectations for fiscal stimulus.
Signs of a slower recovery in the labor market also might put pressure on lawmakers to come up with more aggressive measures to support further job gains.
The S&P 500 /zigman2/quotes/210599714/realtime SPX -1.12% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.88% both traded positive on Thursday. The S&P 500 is now less than 2% away from its all-time high of 3386.15 set on February.