Treasury Yields Plunge on Weak Payroll Growth
Friday’s surprisingly weak jobs report sparked a furious rally in the bond market, knocking benchmark Treasury yields to eight-month lows. Stocks were flat, capping a week of modest gains.
The news that U.S. payrolls grew in February by 21,000 jobs -- versus Wall Street expectations of 130,000 -- forced investors to rethink the view that an interest rate hike from the Federal Reserve could come as soon as this summer to stave off inflationary pressures.
With job growth still sharply lagging behind the pace typically seen during an economic recovery, strategists now are divided over whether the Fed will tighten rates before the November election, with an increasing number of analysts expecting no action until 2005.
“The bond market has thrown in the towel on a jobs recovery,” said Sung Won Sohn, economist at Wells Fargo in Minneapolis.
“Investors are basically saying that economic growth will be slow for the balance of this year. The Fed won’t be raising rates anytime soon, so monetary policy is not an issue.”
The yield on the 10-year Treasury note plunged to 3.85% from 4.02% on Thursday, reaching its lowest level since July 14 and marking the steepest one-day drop in more than five years on a percentage basis. The 30-year yield sank to 4.76% from 4.88%, its lowest level since July 11.
After a long period of disappointing job growth, bond traders had been expecting a particularly robust report.
“The bond market had steeled itself for a pretty decent jobs number, and the ‘whisper number’ being rumored about was even higher,” said David MacEwen, head of fixed-income funds at American Century Investments in Mountain View, Calif. “Everybody was caught off guard.”
The stock market took the data in stride, however, with the major indexes little changed.
The Dow Jones industrial average rose 7.55 points, or 0.1%, to 10,595.55. The broader Standard & Poor’s 500 index climbed 1.99 points, or 0.2%, to 1,156.87. And the technology-heavy Nasdaq composite index fell 7.48 points, or 0.4%, to 2,047.63.
Winners outnumbered losers by 2 to 1 on the New York Stock Exchange, but breadth was even on Nasdaq.
“Ironically,” MacEwen said, had the jobs report been healthier, “the stock market probably would have been down on a higher [interest] rate scenario.” As it stands, he said, even modest economic growth against a backdrop of tame inflation remains positive for stocks.
For the week, the Dow gained 0.1%, the S&P; 500 added 1% and Nasdaq advanced 0.9%.
Along with the economic news, other factors fed Friday’s Treasury rally, analysts said.
Overseas players including the Bank of Japan were believed to be big buyers at Friday’s bond auction, said Bill Hornbarger, fixed-income strategist at brokerage A.G. Edwards & Sons in St. Louis. Foreign bankers want to keep the dollar from becoming too weak, he said, because they count on exports to the United States to help their economies.
Bond “short covering” also played a role, Hornbarger said. Short covering occurs when investors who sold borrowed securities in hopes of buying them back later at a lower price and pocketing the difference, add firepower to the market’s upward momentum by making purchases that unwind their wrong-way bets.
Among the highlights:
* Housing stocks got a lift on hopes for low mortgage interest rates. Centex surged $3.80 to a 52-week high of $115.50, Pulte Homes climbed $2.75 to $57.72 and lender Countrywide Financial rose $3.91 to $96.55.
* McDonald’s gained $1.01 to $29.85 after saying domestic sales rose 20% in February.
* Chip giant Intel lost 70 cents to $28.95 after its mid-quarter update disappointed some analysts. Among other blue chips, Wal-Mart Stores slipped 81 cents to $60.24.
Market Roundup, C4-5
