The recent decline in Treasury yields should not be the surprise that many analysts claim it to be. Moreover, the forces that have created the latest downtrend are likely to extend the decline, especially after next week's slate of Treasury borrowing of 3-year and 10-year notes and 30-year bonds. On Friday, for example, the Treasury ten-year yield edged down to 3.15% from 3.29% the week before. And that decline came despite what some viewed as a stronger than expected 244,000 rise in April nonfarm payrolls. But, an array of economic and financial developments were more than offsetting, supporting a decline in Treasury yields as well as commodity prices.
The increase in nonfarm payrolls was a seemingly respectable 244,000. But, it was more than overshadowed by a rise in the unemployment rate to 9.0% from 8.8%, largely reflecting a sizeable 190,000 decline in April household survey employment. There is disagreement among analysts as to which is the more reliable employment survey, the nonfarm payroll or the houshold survey. However, there is evidence to suggest that at the current stage of the business cycle it is the household survey that is more reliable as an indicator of the state of the economy and, of course, the employment situation. Despite a rise in the nation's population, the civilian labor force declined 1.1 million over the past year, when it should have been rising significantly. The reason for the disparity is that discouraged unemployed workers are leaving the labor force after giving up hope of finding a job. The broader U-6 unemployment rate counts as unemployed not only discouraged workers, but those who were unable to find the full-time employment they seek and out of necessity took part-time work. This U-6 unemployment rate rose to 15.9% in April from 15.7% the month before.
Bill Gross, who heads up Pimco Investments, indicated that the economy is not strong enough to even sustain the emplyment growth we are achieving. That is a very dissappointing assessment considering that employment is not even keeping pace with population growth, let alone remploying the million who lost jobs in the great recession.
The first quarter real GDP rose at a subpar 1.8% annual rate, down from 3.1% in the previous quarter and 3.7% in the first quarter last year. This hardly appears to be a vigorous recovery. And the risk is that the pace will either stay slow or weaken further. The various forms of Federal stimulus is ending. There will be further declines in housing prices as the backlog of unsold homes rises with the coming increase in the foreclosure pace. State and local governments will continue to cut their spending and trim staff, as well as raise taxes, as they try to cut their budget deficits.The global economy will slow as the debt crisis in Europe persists and threatens to widen and China attempts to curtail speculation and inflation.
The announced mid-year end of the Federal Reserve's second round of quantative easing,in which the Fed purchases Treasury securities, will lessen the flow of funds into speculation in commodities. It is the anticipated end of that program and the first efforts to reign in the Federal budget deficit, thereby undermining inflation fears, which are contibuting to the decline in Treasury yields and commodity prices.
With huge excess capacity to produce and lingering high unemployment there can be little sustained inflation pressure, even with the rise in oil, food and other commodity prices. And while there is inflation fear, there is no realistic realty of sustained inflation any time soon. That not only precludes a significant rise in Treasury yields, it should lead to still lower Treasury yields, including a 10-year yield below 3.00%.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
This and prior reports can be accessed by going to Internet Explorer and typing in Philipbraverman.blogspot.com
I can be reached at philipbraverman@Gmail.com
Saturday, May 7, 2011
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