The latest nonfarm payroll report shows the US economy created 88,000 jobs in March following a revised 268,000 gain in February though the jobless rate slumped to a four-year low of 7.6 percent due to a decline in the size of the labor force and participation rate.
The labor force participation rate and the number of people leaving the workforce have been disappointing and nobody expected the latest round of readings in the middle of a recovery, says Sharon Stark, Fixed Income Strategist at DA Davidson.
Asked if the bond rally will hold in the future after today’s jobs number, Sharon said investors can use this opportunity to shed some of their non-performing assets, especially those which may deteriorate in value when interest rates start to climb. There may be some backtracking from where yields were and markets are likely to see some consolidation around 1.75-1.80 percent for 10-year Treasury notes, though this opportunity should be used for cleaning up fixed-income portfolios, she added.
Asked if she would consider the slump (in equities) as an opportunity, Sharon said that in the bond market there is a selling opportunity since prices have mostly moved up after the latest job numbers came in. However, for equity markets, it’s a very difficult situation and investors should do the opposite and use this opportunity to add stocks to the portfolio, she argued.
Asked if she thinks the rally in equities was a little overextended given the markets’ sharp reaction to the disappointing 88k number, Sharon said it was definitely overdone. The economic fundamentals are improving, but not improving that much, which is worrysome and that is something investors need to keep an eye on, she observed.
Asked to explain the recent market trends where bond yields have been sliding for the past three weeks, but equities have been rallying simultaneously due to the Fed’s loose monetary policy, Sharon said the fixed-income market is rallying due to a “flight to quality” and that’s what’s keeping the yields low.
When investors are in an environment that they are in now where inflation is around 1.7 to 2 percent, you would expect yields to be higher than current levels. But because of the flight to safety, capital inflows from overseas are keeping US yields low. Sovereigns are piling up more US bonds.
The latest Treasury report shows holdings by the Japanese have increased significantly. Countries in Europe, which normally don’t buy US securities, are increasingly lapping up US government debt, she concluded.