One of the most important events for the bond market is the monthly jobs data, which is released to much fanfare on the first Friday of every month. The employment picture is the most important component of the U.S. economic outlook, since consumer spending makes up 68.5% of U.S. gross domestic product according to the Bureau of Labor Statistics. Consumer spending, in turn, drives the production of goods and services, which leads to higher employment, sparking further consumer spending, and so on.
Given the crucial nature of the employment picture, investors were alarmed to learn that the U.S. economy added no new jobs in August. This represented the worst jobs report since September, 2010, and it is another sign that the economy has begun to slow precipitously. The report also revised lower the estimated job growth released in the June and July reports. Keep in mind, the economy has to add about 250,000 jobs every month just to keep up with population growth. That appears to be a tall order right now, with businesses reluctant to hire and government entities looking for ways to cut costs.
As is typically the case, bad news for the economy was good news for bonds. The prices of Treasury bonds surged, causing yields to decline near their mid-August lows. The yield on the 10-year Treasury note stood at 2.04% at mid-day Friday, which compares to 1.98% on August 18 and 2.04% at the height of the financial crisis in December, 2008. Clearly, investors are distressed by the current state of the U.S. economy.
The latest piece of bad news comes on the heels of Federal Reserve Chairman Ben Bernanke's recent statement that the Federal Open Market Committee is likely to keep short-term rates at their current levels near 0% for at least two more years. In combination with the continued signs of slowing economic growth, it appears investors have taken recent news events as a clear green light to keep buying Treasuries even at yields that barely can keep up with inflation.