Monthly Jobs Report and the Bond Market

One of the most important events for the bond market happens every first Friday of every month at 8:30 a.m. Eastern time. That's when the U.S. Bureau of Labor Statistics reports the latest jobs data. Of all the economic reports released each month, the jobs report has the largest impact on the bond market.

The national Current Employment Statistics report shares information related to all aspects of the job market. This includes the unemployment rate, the absolute number of jobs added or lost, total hours worked, average hourly wages, and how the jobs picture for various sectors has fared (such as government, restaurants, or manufacturing).

The job market is the heartbeat of the economy. That's why the employment report is so important. It's an indicator of economic health. A strong economy prompts companies to hire more workers. It's also an engine of growth. Higher employment means more dollars to spend on goods and services. Without job growth, overall economic growth is likely to be limited, no matter what else is happening in other areas of the economy.

Impact of a Positive Jobs Report on Bonds

Since jobs are so important to the economic outlook, investors take a positive report as a sign that growth is on track. This tends to depress bond prices for two reasons.

Higher Interest Rates

The Federal Reserve is more likely to raise interest rates in the future in a strong jobs market. Since the Fed Funds Rate heavily influences yields on short-term bonds, the prospect of the Fed raising rates causes yields to rise and prices to fall for Treasuries and other rate-sensitive segments of the market such as municipal bonds, mortgage-backed securities, and higher-quality corporate bonds.

Inflation

Stronger jobs growth raises the likelihood of inflation. Since higher inflation eats away at bond prices, the prospect of rising price pressures is typically negative for bonds. In reality, the link between growth and inflation is tenuous. In this case, it’s the perception that counts.

Impact of a Negative Jobs Report on Bonds

A weaker jobs report tends to be positive for the bond market for the opposite reasons of those just mentioned. It makes the Fed more likely to cut rates than to increase them, and it reduces the odds of inflation. Both are positive for the performance of U.S. Treasuries and other rate-sensitive investments.

The Jobs Report and Market Expectations

One key aspect of the report is not just how many jobs are added or lost, but how the result compares to market expectations.

The market reacts to the short-term impact of each month's report, even though the jobs number is known to be volatile on a month-to-month basis.

A single report is hardly the be-all and end-all. It's a snapshot in time. Most economists look at the trailing three-month average at a minimum. Often, they will gauge growth using 12- to 24-month trends.