Exuberance in the Bond Market
Check out what’s happened to the yield on the 10 year treasury note in recent days:
Ever since last Friday’s weaker-than-expected employment report, the bond market has been going like gangbusters. Yields on 10 year government bonds have plunged from over 4.0% to 3.7% in a matter of just a few days – a truly remarkable drop.
The financial press has mainly been explaining this as due to the fact that the employment report reassured investors that the Fed won’t raise rates any time soon. Perhaps. But were bond market participants really expecting the Fed to increase rates that soon? And do moves in the Fed funds rate really affect the 10-year bond yield so dramatically? I’m not convinced.
Here’s another theory to try on for size: maybe Friday’s employment report convinced some important bond market players that the recovery has already passed its prime, and that the economy won’t be zooming ahead for the rest of this year like many people thought a month or two ago. If the economy fails to strengthen later this year, then the demand for borrowed money that the bond market was expecting won’t materialize, so long rates won’t rise later this year as previously expected…