- Initial unemployment claims remain in favorable shape but nervousness continues on hiring
- 30-year T-bond auction to yield near 2.51%
- Inflation-adjusted Treasury curve is negative out to 6 years
Initial unemployment claims remain in favorable shape but nervousness continues on hiring — The initial unemployment claims series saw a temporary run-up in late April to post a 1-1/4 year high of 294,000 in the first week of May. However, the series then fell for three straight weeks by a total of -27,000 to last week’s level of 267,000, which was only +19,000 above the 42-2/3 year low of 248,000 posted in March. The low level of initial claims indicates that businesses are mostly holding on to their employees and are not engaging in any significant degree of layoffs. Meanwhile, the continuing claims series also remains in good shape at only +48,000 above the 15-1/2 year low of 2.124 million posted in April.
The market consensus is for today’s initial unemployment claims report to show a small +3,000 increase to 270,000 after last week’s -1,000 decline to 267,000. The consensus is for today’s continuing claims report to show a -1,000 decline to 2.171 million, falling back a bit after last week’s +12,000 increase to 2.172 million.
Even though businesses are holding on to their existing employees, they are clearly reducing their hiring of new employees, as evidenced by the downtrend in payroll growth. Payroll growth was relatively strong at +233,000 in February but then faded to +186,00 in March, +123,000 in April and +38,000 in May (+73,000 ex-Verizon strike).
Businesses are pulling back on hiring due to (1) the weak GDP growth rates of +1.4% in Q4 and +0.8% in Q1, (2) already-high staffing levels as evidenced by the poor Q1 labor productivity figure of -0.6%, (3) rising labor costs as evidenced by the sharp +4.5% increase in Q1 unit labor costs, and (4) the profit recession that is putting pressure on businesses to cut costs. The question is whether hiring will pick back up as GDP growth improves in Q2 or whether the hiring softness will worsen and/or cause consumer confidence and spending to sag.
30-year T-bond auction to yield near 2.51% — The Treasury today will sell $12 billion of 30-year T-bonds, concluding this week’s $56 billion coupon package. Today’s 30-year auction will be the first reopening of the 2-1/2% bond of May 2046 that the Treasury first sold last month.
Today’s 30-year T-bond issue was quoted at 2.51% in when-issued trading late yesterday afternoon. That translates to an inflation-adjusted yield of 0.78% against the current 30-year breakeven inflation expectations rate of 1.73%.
The 30-year T-bond yield in mid-May rose by about 14 bp to 2.69% after the hawkish comments by various Fed officials and the hawkish April 26-27 FOMC minutes. However, the 30-year T-bond yield has since reversed those gains and is currently trading at a 4-month low of 2.51%. The low level of the 30-year bond yield will not attract many domestic investors to today’s 30-year bond auction, but demand from foreign investors should still be strong considering that long-term bond yields in Europe and Japan and near or below zero.
The 12-auction averages for the 30-year are as follows: 2.35 bid cover ratio, $11 million in non-competitive bids to mostly retail investors, 5.3 bp tail to the median yield, 15.7 bp tail to the low yield, and 53% taken at the high yield. The 30-year is mildly above average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 58.5% of the last twelve 30-year T-bond auctions, which is mildly above the average of 56.7% for all recent Treasury coupon auctions.
Inflation-adjusted Treasury curve is negative out to 6 years — The U.S. Treasury curve on an inflation-adjusted basis is in negative territory from 3 months out through 6 years. That means that investors who buy Treasury securities with maturities of 6 years or less can expect to lose money on their investment on an inflation-adjusted basis if actual inflation turns out to match expected inflation. Investors in longer-term Treasury securities can expect to make a little money on an inflation-adjusted basis, but perhaps not enough to compensate them for locking up their money for a relatively long period of time.
Nominal Treasury yields remains artificially low because of the Fed’s extraordinarily easy monetary policy and the Fed’s peg of short-term rates near zero. Meanwhile, inflation-adjusted Treasury yields are also poor because of the recent rise in inflation expectations sparked by the 3-month rally in crude oil prices.
Treasury yields are also artificially low because of the ECB’s and BOJ’s QE programs, which have pushed European and Japanese government bond yields down to near or below zero. The 10-year bund yield yesterday closed at 0.06% and the 10-year JGB yield yesterday closed at -0.10%. The extraordinarily low level of European and Japanese bond yields artificially increases demand for U.S. Treasury securities, also helping to push Treasury yields down to artificially low levels.
The extraordinarily low level of U.S. Treasury yields is likely to continue in coming quarters, assuming that U.S. inflation remains low and the Fed raises interest rates at only a glacial pace. However, Treasury yields at some point will have to rise to a more normal spread above expected inflation since investors will not continue to forever put their cash in investments that produce little or no inflation-adjusted returns.
