Treasuries rose on Friday after a report from the Labor Department showed wages unexpectedly declined in December, sparking speculation the Federal Reserve will take a slower pace with interest-rates increases.
Two-year note yields fell to a three-week low after this mornings release showed average hourly earnings of workers dropped 0.2 percent. The difference between two- and 30-year yields widened to almost the most this year as the economy added more jobs than forecast last month, ending the best year for the labor market since 1999.
During the session Two-year note yields reached the lowest level since Dec. 17. falling five basis points, or 0.05 percentage point, to 0.56 percent at 11:46 a.m. New York time, according to Bloomberg Bond Trader data. The 0.625 percent securities maturing in December 2016 added 3/32, or 94 cents per $1,000 face amount, to 100 1/8.
There was some good news in the report however, data showed that employers added 252,000 jobs last month, versus a forecast in a Bloomberg News survey for 240,000.
The jobless rate also declined to 5.6 percent, the lowest level since June 2008, wrapping up the best year for the labor market since 1999 and adding to evidence the U.S. is a standout in the global economy. The December jobs gain followed a 353,000 rise the prior month that was more than previously estimated.
Todays Other Top Stories
Learn Bonds: – Understanding bond risk – Part 1. – Many investors think of bonds as “safe”. That’s not really a good idea. Bonds are “safer” compared to some other investments, but not as safe as others. In a period of unprecedented market changes, where the bond market has been manipulated by the Federal Reserve’s quantitative easing program, understanding bond risk is very important. In this short series of articles I will cover the five types of risk inherent in bonds.
Bloomberg: – Puerto Rico may allow higher yields on bond sale to lure buyers. – Puerto Rico lawmakers plan to alter a bill so the Government Development Bank can offer higher interest rates on a $2.9 billion petroleum-tax-backed bond sale to increase demand for the debt.
Reuters: – Bondholder sues bankrupt San Bernardino for favoring Calpers. – A corporation that holds $50 million of San Bernardino’s pension bonds sued the city on Wednesday for giving preferential treatment to California’s public pension system as San Bernardino navigates a third year in bankruptcy.
Bloomberg: – Indiana fertilizer planning bond deal by April as plant advances. – A $1.3 billion municipal-bond sale for a fertilizer plant in Indiana may come to market by April, two years after the state expressed concern that the product from the Pakistani company backing the project was linked to explosives.
Charles Schwab: – Municipal bond outlook for 2015: Flatter yield curve, increased volatility. – The stellar returns seen on municipal bonds in 2014, which were boosted by declining interest rates, are unlikely to continue in 2015.
Reuters: – U.S. muni bond supply to spike to $7.27 bln next week. – Debt-hungry investors will get a hefty serving of U.S. municipal bond debt next week, with supply rising to about $7.27 billion from an estimated $4.24 billion this week, according to Thomson Reuters estimates on Friday.
ETF Trends: – How can the bond bull keep going? – In our Weekly Market Update we have made an effort to track the deflationary story being told in the global fixed income markets, specifically sovereign yields have continued to trade lower defying what most investors thought was possible; Swiss 10 year debt recently yielded 25 basis points. A while back I quoted a Seth Klarman Tweet about German debt trading at multi-century low yields.
WSJ: – Short-dated U.S. Government bonds rise after jobs report. – (Subscription) Short-dated Treasury bonds rose on Friday as tame wage inflation offset better-than-forecast jobs growth in December.
High Yield Bonds
S&P Capital IQ: – High yield bond fund cash outflows continue, led by ETFs. – Retail-cash outflows from U.S. high-yield funds totaled $922 million during the week ended Jan. 7, slightly narrower than the $960 million outflow during the week ended Dec. 31, according to Lipper.
FT: – Junk bond funds suffer sixth week of withdrawals. – (Subscription) The five day sell-off in US equity indices at the start of the year was mirrored in the junk bond market. Investors pulled $922m from mutual funds and exchange traded funds investing in the securities in the week to January 7, the sixth consecutive week of withdrawals, new data from Lipper shows.
FT: – Energy bondholders could lose out in refinance deals. – (Subscription) Investors in debt issued by riskier oil and gas companies face the threat of losing out as borrowers seek new financing secured against their assets, Moody’s has warned.
Bloomberg: – Energy borrowers find loans come at steep price. – Energy companies that were all but shut out of debt markets by a 55 percent drop in oil prices are starting to find investors willing to lend them money to keep drilling — albeit at a steep price.
Bloomberg: – RBC high-yield credit head Steve Oplinger said to leave firm. – Royal Bank of Canada lost the head of its U.S. high-yield sales and trading unit today after the lender rose to become one of the top 10 underwriters of the debt.
Market Realist: – The tables have turned for fund flows in high yield bonds. – The prolonged low interest rate environment has prompted investors to seek out riskier assets, like high yield. Matt Tucker explains why it’s important to know what you own when it comes to this segment of the bond market.
Bloomberg: – Goldman loves those junk bonds that main street is running from. – Wall Street analysts are calling the junk bonds that individual investors are dumping one of the best bets for 2015.
Businessweek: – Wall Street’s guide to surviving emerging-market despair. – It’s discouraging to be an emerging-markets investor right now. No matter how you slice it, 2014 was a rough year: Stocks posted their second straight 5 percent annual decline; currencies sank to a 12-year low against the dollar; and developing nations’ borrowing costs climbed relative to benchmark U.S. Treasuries. Don’t give up yet.
Reuters: – Emerging markets face tough year. – Emerging markets are beginning 2015 with the gravest risks threatening the asset class since the height of the financial crisis.
ETF Trends: – U.S. equity ETFs aren’t the only game in town. – Financial professionals are blaming the latest round of risk asset uncertainty on a variety of factors, from the continuing sell-off in oil to the possibility of Greece being kicked out of the euro-zone. Still others are pointing to anxiety over the U.S. Federal Reserve’s intention to raise its overnight lending rate target in mid-2015 – the first move of its kind since December of 2008.
BlackRock: – Why people tend to use bonds in retirement + how to build a strategy of your own. – There’s a rule of thumb that says bonds are the go to investment for retirees. Matt Tucker explains why this is the case, and how investors should think about bonds as they transition to this next phase.
Morningstar: – ETF Flows Set a Fresh Record in 2014. – The $241 billion of inflows into U.S. exchange-traded funds in 2014 were the strongest ever and topped the $190 billion inflow in 2012. Strong flows and market appreciation helped push assets to $2 trillion, and that milestone comes just four years after hitting $1 trillion.
The Treasury should be selling as many 30-50 year bonds as it can now and tell the Fed not to sterilize.
— Douglas Kass (@DougKass) January 9, 2015
Despite strong headline #jobs, decline in avg hourly earnings leading to lower short/interm yields. Small push back on first hike timing
— AnthonyValeri (@Anthony_Valeri) January 9, 2015
Stocks AND bonds gain after goldilock-ish US NFP data that show solid employment gains, but very soft wages. 10yr <2% pic.twitter.com/S6zvRhH9uy
— Holger Zschaepitz (@Schuldensuehner) January 9, 2015
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