2-Year Treasury Yield Back to Mid-September ’15 Highs

Friday morning, November 6th, Wall Street gets the monthly update on the job market as the October ’15 nonfarm payroll report is set to be released at 7:30 am.

The last two jobs reports have been on the weaker side, with September ’15 nonfarm payrolls coming in at 141,000 versus the consensus estimate of 199,000 – 200,000. (Was the Hewlett-Packard headcount reduction of 30,000 jobs in the September number ? How has the Energy sector influenced nonfarm payroll growth ?)

Per Briefing.com, the economist consensus for October ’15’s payroll report is 181,000 net new jobs to be created, with an expectation of 160,000 jobs created by the private sector.

The 2-year Treasury has spiked back to its mid-September ’15 high of 81 bp’s just prior to the September ’15 FOMC meeting and as of this writing might actually be a trading a little higher at 84 bp’s.

My only thought this week has been, “What Has Changed ?” i.e. since mid-September ?

Here is my pre-September ’15 FOMC meeting comment¬†where the thinking was the FOMC was NOT going to move.

Janet Yellen left the impression this week that a December ’15 rate hike might be a real possibility, but I would think that the Street would need to see a +250,000 – +275,000 jobs number tomorrow morning AND a 4.9% unemployment rate.

It is the unemployment rate that has been the one constant, “bearish” indicator for those expecting higher interest rates.

Conclusion: Client fixed-income allocations have for the most part seen a small weighting in the TBF or the Inverse Treasury ETF for most of the last 6 years. Clearly it has been my worst trade of the last half-decade, but the account weight has been managed, and since the TBF is unlevered, investors don’t run the risk of the time decay inherent with levered ETF’s. In 2013, with the Taper Tantrum of Chairman Ben Bernanke, the TBF made up for a lot of lagging fixed-income relative performance. The point of this being (to readers) is that – at some point – ZIRP will end. Everything changes in the capital markets. Euphoria to extreme pessimism, value to growth, large-cap to small-cap, US to International and back again. Every trend ends in investing, at some point. Will ZIRP end in December ’15 ? Let’s see what job growth looks like.

The best, most cogent and intelligent rationale for the below-trend economic growth I’ve heard in the last 5 years came from Rick Reider of Blackrock at a CFA Society of Chicago luncheon: Rick explained that given Dodd-Frank, CCAR (Comprehensive Capital Analysis and Review) and such, leverage within the Financial and US Banking System is still below that of the 1990’s and mid 2000’s. Rick thought the next growth catalyst higher would be when that “re-leveraging” occurs.

The Fed and the FOMC have been fighting the classic Liquidity Trap since early, 2009. It has been ugly to say the least.

Large bank, Sept ’15 quarterly earnings reports seemed to indicate that corporate lending was growing high-single-digits year-over-year, and was improving.

From my perch, I just dont know if we are there (i.e. re-leveraging) yet.

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