January’s strong jobs report lifted bond yields. Why’s that?
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The number of jobs the economy added in the first month of 2023 blew past most analysts’ wildest expectations: 517,000, according to the U.S. Bureau of Labor Statistics.
Surveys show economists were expecting less than half that, and the bond market did something almost instantly on the news — yields, or bond interest rates, rose.
In other words, investors the world over decided they needed higher returns to make it worth holding bonds, based, at least in the short term, on the strength of job creation.
Bonds are like a gallon of milk. Milk has to last a week, and a 10-year bond has to last for 10 years. This means it has to offer a competitive return for that period, or else it will look rotten. Yields had to go up Friday to stay competitive, and that is because investors now believe interest rates will go up more in the future than they thought.
So why did that happen? It starts with the jobs reports.
“Why the jobs report is so important right now is what it tells us about the wage growth outlook,” said Jake Jolly, senior investment strategist at BNY Mellon Investment Management. With so many jobs open and so few people unemployed, the labor market is tight.
“That results in an imbalance between supply and demand,” Jolly explained. “And the way you balance that market is essentially by paying higher wages.”
Higher wages are enticing, but they could be a problem.
“If they’re rising too quickly, that can influence levels of inflation throughout the economy,” said Mark Cabana, head of U.S. rates strategy at Bank of America Securities.
Inflation in the service sector is the big concern right now, and, therefore so are the wages of the workers providing services. Simon Harvey, head of foreign exchange analysis at Monex Europe, said there’s more to the number of jobs in January than just the amount.
“It’s not just a monstrous employment figure that we had today,” Harvey said. “If you scratch beneath the surface, job gains were primarily concentrated in nonhousing services, which is the area where the Fed has its biggest inflation problem to date.”
These massive job numbers are a sign that inflation might make a slower exit than originally thought.
“Investors are thinking this might put additional pressure on the Federal Reserve to continue pushing up interest rates and keep rates higher for longer,” added Mark Zandi, chief economist at Moody’s Analytics.
The Fed has been saying this for a while — that it’s too early to declare victory in the battle against inflation. But per Harvey, a lot of bond investors did not believe it. He said investors were making bets that the Fed would pause its interest rate hiking campaign and even lower rates this year.
“The jobs data really knocked them back in line,” Harvey said.
Long story short, the jobs numbers made bond investors suddenly realize that inflation might take a little longer to beat than they anticipated.
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