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Market’s Jobs Response Signals Yield-Curve Control Is Here

Brian Chappatta

(Bloomberg Opinion) -- If the past two days of trading in U.S. Treasuries are any guide, yield-curve control might have already reached the world’s biggest bond market.

On Thursday, Labor Department data showed a record 6.65 million people filed jobless claims in the week ended March 28, blowing past estimates for 3.76 million. When added to the previous week’s tally, it showed almost 10 million Americans were out of work because of the coronavirus pandemic. And yet, 10-year Treasuries took those figures in stride. The borrowing benchmark fluctuated by less than 7 basis points, the tightest range since Feb. 19, the same day the S&P 500 Index hit a record high. It closed 1 basis point higher than where it started the day, at 0.597%.

On Friday, Labor Department data showed U.S. payrolls fell 701,000 in March compared with February, the first decline since 2010 and far exceeding the median forecast for a 100,000 drop. The jobless rate rose to 4.4%, the highest since 2017, and strategists are already expecting the April report to show nothing short of a crash, with 20 million jobs lost and an unemployment rate of 15%. Again, 10-year Treasuries barely budged at about 0.59%.

From an economic state-of-play perspective, Friday’s jobs report was always going to be stale. It only captured payrolls from the week that included March 12 — when many people were still reporting to work as usual. Bond traders are paid to look ahead, and no employment figures right now will help in that effort. They have the same question as the rest of America: “Is the worst over yet?”

Until they get an answer, the best way forward seems to be counting on the Federal Reserve to take whatever actions are necessary to keep the $17 trillion Treasuries market in order. Effectively, bond traders seem to be entering a period of unofficial “yield-curve control” as long as the world’s largest economy deliberately grinds to a standstill.

The increase in the Fed’s balance sheet since the job report’s reference date has been nothing short of extraordinary. The central bank gobbled up $1.5 trillion of assets in the past three weeks, far and away the steepest climb on record. It has started to scale back only slightly, while also introducing a temporary repurchase agreement facility that lets other central banks swap Treasuries for dollars. That should stem forced sales by so-called foreign official holders.

It seems reasonable to expect the Fed to continue outright purchases for the foreseeable future, given that the Treasury will ramp up issuance to cover the $2 trillion coronavirus relief package. Taking cues from the central bank is at least a more reliable strategy than trying to read between the lines of horrid jobs data. Wage growth, once the most important figure in the monthly release, is now meaningless. Average hourly earnings actually beat expectations in March by rising 3.1%, likely because a large group of lower-paid workers lost their jobs.

I have called yield-curve control, an idea championed last year by Fed Governor Lael Brainard, a bond trader’s nightmare. That’s probably still true, though the wild price swings of March were arguably even more frightening. To be clear, the central bank has not officially set any sort of target. But it has provided clear forward guidance: the Fed will buy “in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.”

With so much still unknown about how long it will take the U.S. to slow the pace of the coronavirus outbreak and what the ultimate economic damage will look like, it makes sense that traders would find comfort in a range. While Bank of America Corp. technical strategists said this week that 10-year yields could hit zero in the next three months, somewhere around the current 0.6% feels about right, given what’s known about the labor market and nationwide shutdowns so far, as well as what’s contained in the relief package.

Treasuries have little data to trade on except glimmers of hope that the global economy will get to the other side of this crisis sooner rather than later. That’s not a backdrop for decisive trades. It’s not quite yield-curve control, but it’s close.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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