Payrolls Not Too Hot, Not Too Cold
It appears that the corporate-bond market believes Friday's jobs report was high enough to suggest an advancing economy, but not so strong as to prompt a Fed taper.
Corporate credit spreads tightened significantly after the employment report was released Friday. It appears that the corporate bond market believes the employment report was high enough to support the expectation that the economy is still moving forward, but not so strong as to prompt the Federal Reserve to taper its asset-purchase program. With the Fed continuing to purchase mortgage-backed securities and long-term Treasury bonds, investors have increasingly fewer fixed-income assets from which to choose. This decrease in supply is becoming even more pronounced as the U.S. government's deficit is shrinking and requiring less new debt issuance. This has positively affected the demand for corporate bonds as the supply of available fixed-income securities constricts and the new Fed-provided liquidity looks for a home.
The average spread in the Morningstar Corporate Bond Index tightened 4 basis points over the course of the week to +129, returning to its tightest level of the year. Interest rates, however, continued their march higher as the yield on the 10-year Treasury bond rose 14 basis points to 2.88%. In our fourth-quarter market outlook, published Sept. 25, we highlighted our expectation that over the long term interest rates will normalize toward historical metrics. Based on three of the metrics we watch (the spread between current inflation and interest rates, inflation expectations, and the steepness of the Treasury curve), we think the 10-year Treasury will rise to around 4% after the Fed begins to taper its asset purchases.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.