The Bond Market Reacts
Apparently the bond market was taken by surprise by this morning’s employment report. The interpretation clearly seems to be that this is a strong sign that the economic recovery is seriously gathering strength, so interest rates are set to rise. Here is the yield on the 10-year bond over the past 5 days:
(note: interest rate expressed in tenths of a percentage point, so 45 = 4.5%.)
Note that of the 15 basis point rise in long term interest rates this morning, 11 of them reflect an increase in the real interest rate, and 4 of them reflect an increase in inflation expectations. (To see this, check the change in yields on inflation indexed and non-indexed treasuries, available here among other places.) For bonds of shorter maturity the carnage has been even worse this morning. Perhaps now we’ll see how robust the economic recovery is to noticeably higher interest rates.
p.s. Also note that the price of oil hit $40 per barrel this morning, for the first time since 1991. Not that $40 is a particularly magical figure, but landmarks like that always catch people’s attention.