Bond Market Perspectives | Week of March 3, 2014
- We expect uncertainty over the true trajectory of the economy to keep Treasury yields range bound over the near term.
- We believe investors should remain on guard for the unwinding of weather-related impacts, which may push bond prices lower and yields higher.
- The predominant impact following colder and snowier winter weather was higher yields in 2010, 2007, and 1996.
Weather and Treasury Yields
The start of a new month means a new batch of top-tier economic data in the form of the monthlyemployment report and the Institute for Supply Management (ISM) manufacturing survey. Both areviewed as among the more reliable reports to gauge the health of the economy and have a history ofmoving bond prices and yields. In last week's commentary, Bond Market Perspectives: Weather Exhaustion, we noted the bond market was beginning to ignore recent weather-impacted economic data and look forward to spring, when weather distortions may fade. Yesterday's ISM for February 2014 was better than expected and showed the first incremental signs that weather distortions on the economy may be slowly fading. Treasury prices rose as Ukraine uncertainty prompted buying, but the potential for higher yields in response to better economic reports still exists.
All eyes now turn to Friday's employment report for February 2014 for evidence of any bounce back in jobs following lackluster reports in December and January. The December 2013 report was weak largely due to a significantly greater number of people unable to work because of severe weather. The January 2014 report was mixed, with some positive signs, but the question of adverse weather impacts was not fully resolved. A strong February report could dispel weather-related economic worries and push bond prices lower and yields higher.
February has seen a continuation of the severe weather impacting large parts of the country this
winter. A robust report is not expected, but all the more reason why a surprise may push yields
higher. Colder and snowier-than-average weather has adversely impacted a host of economic reports in 2014, but this is certainly not the first time weather has affected the economy.
A look back at other severe winters and colder and snowier-than-average weather may indicate
possible bond market reactions. Prior to the current December 2013 - February 2014 period, the
episodes below highlight prior months or periods of colder and stormier-than-normal winters,
according to the National Climatic Data Center (NCDC), impacting a significant portion of the
country. The NCDC ranks the months below among the top third of coldest months of the past 120
years that are characterized by severe storms. Evidence of adverse weather impacts were cited on key economic reports during each of the periods below.
January-February 2010: Severe cold and harsh storms were suspected of having a negative
impact on economic data, most prominently the jobs report, during both months. The February
employment report showed a job loss after a modest gain in January of that year. The following
March and April employment reports witnessed significant improvement with average job gains of
more than 200,000 in each month. In 2010, the 10-year Treasury yield increased by 0.4% from early
March through early April as job gains improved, and the current 2014 experience correlates very
closely with the 2010 episode [Figure 1]. A similar move today would put the 10-year yield slightly
above the recent high of 3.0% and erode much of the year-to-date gains in the broad Barclays
Aggregate Bond Index.
The rise in yields that followed a fading of weather impacts in 2010 was brief, however. The Federal Reserve's (Fed) first round of bond purchases known as quantitative easing one (QE1) ended on March 31, 2010. When the Fed halted bond purchases, concerns over the economy's ability to stand on its own and a series of soft economic reports sent Treasury yields to a multi-month decline.
February 2007: Colder-than-normal weather was evident in only one month in 2007 instead of
several. Although some reports in late February to early March were suspected of being
weather-impacted, the decline in Treasury yields in February of that year was primarily a result of
early concerns over loan defaults at banks. Treasury yields increased by 0.3% from early March to
early April of that year but would ultimately finish the year lower [Figure 2]. A similar 2007-like
move today would put the 10-year Treasury back to the high end of the recent range at 3.0%.
December 1995-February 1996: Like now and in 2010, the winter of 1996 witnessed several
months of extreme weather, helping to keep Treasury yields stable. The January 1996 employment
report, released in early February, showed an outright decline, and the average gain over December and January was a paltry 57,000. The February employment report, released in early March, was a blowout and saw payrolls spike over 400,000 as weather-related impacts faded. Treasury yields jumped with the 10-year Treasury yield rising by 0.8% from early March through early April. Note that Treasury yields began to increase in mid-February as investors, similar to today, began to anticipate a decrease of weather impacts [Figure 3]. A similar blowout report appears unlikely in today's environment, but shows the capacity for lower bond prices and higher yields as weather-related impacts recede.
January-February 1994: This colder-than-normal winter period had a modest impact on
economic data but was overshadowed by the Fed, a primary driver of the bond market. Despite a
more difficult winter than usual, bond prices declined, and yields began to rise steadily in
anticipation of a series of interest rate hikes.
January-February 1993: Once again, weather impacts were more than overwhelmed by the Fed.
Bond prices may have received a modest boost from weather impacts and softer economic data on its own merits, but Fed rate cuts were the primary driver of higher prices and lower yields.
Absent periods when the Fed was moving interest rates, the predominant impact following colder
and snowier winter weather was a payback in the form of higher yields in 2010, 2007, and 1996.
Note all three periods witnessed higher yields during March, where a poor seasonal tendency may
have added to overall weakness, a pattern we will discuss in next week's commentary. We expect
uncertainty over the true trajectory of the economy to keep yields range bound over the near term but believe investors should remain on guard for the unwinding of weather-related impacts, which may push bond prices lower and yields higher.
The opinions voiced in this material are for general information only and are not intended to
provide specific advice or recommendations for any individual. To determine which investment(s)
may be appropriate for you, consult your financial advisor prior to investing. All performance
reference is historical and is no guarantee of future results. All indices are unmanaged and cannot
be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges.
Index performance is not indicative of the performance of any investment. Past performance is no
guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields
will decline as interest rates rise, and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely
payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed
principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Stock and mutual fund investing involves risk including loss of principal.
Bank loans are loans issued by below investment-grade companies for short-term funding
purposes with higher yield than short-term debt and involve market, interest rate, and credit risks.
Quantitative easing is a government monetary policy occasionally used to increase the money
supply by buying government securities or other securities from the market. Quantitative easing
increases the money supply by flooding financial institutions with capital in an effort to promoteincreased lending and liquidity.
The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and
dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and
The Institute for Supply Management (ISM) index is based on surveys of more than 300
manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index
monitors employment, production inventories, new orders, and supplier deliveries. A composite
diffusion index is created that monitors conditions in national manufacturing based on the data
from these surveys.
The monthly jobs report (known as the employment situation report) is a set of labor market
indicators based on two separate surveys distributed in one monthly report by the U.S. Bureau of
Labor Statistics (BLS). The report includes the unemployment rate, non-farm payroll employment,
the average number of hours per week worked in the non-farm sector, and the average basic
hourly rate for major industries.
This research material has been prepared by LPL Financial.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
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