With the Fed believed to be readying another rate hike, bonds offer attractive yields even after inflation.
Friday’s June jobs report showed that the U.S. economy continues to hum along, cranking out new jobs at a solid pace.
With no sign of a recession in sight, bond traders believe the Federal Reserve will almost certainly increase the interest rate again at its meeting later this month. That’s a significant shift from a few months ago, when the bond market was anticipating rate cuts by the end of this quarter.
As always, it’s unclear exactly what path the economy and the Fed will be taking in the coming quarters. For now, at least, many in the markets say it’s looking more and more like investors will see interest rates stay high for a longer period.
Treasury Yields and Federal Funds Rate
Not long ago, the prospect of the Fed tightening monetary policy was roiling both the bond and stock markets, but that dynamic has shifted. In fact, after 2022 brought some of the worst returns in history for bond investors, the current landscape seems to be cementing opportunities for them to lock in higher yields.
This sentiment was bolstered by Friday’s employment report, which showed that the economy added 209,000 new jobs during June—roughly in line with expectations for this hard-to-forecast report.
While the increase was smaller than some anticipated, “209,000 jobs is a perfectly healthy number,” says Joshua Jamner, investment strategy analyst at ClearBridge Investments. “Economic growth and activity seem to be slowing, but it’s still very healthy level.” He notes that from July 2018 through December 2019, when the unemployment rate was under 4%, the economy was averaging 155,000 new jobs a month.
Jamner says the Fed has “made it clear that they’re on a path toward raising rates in July, and there’s nothing I can see in this report that would say that they won’t move ahead with that.” From there, he thinks the Fed can position itself to evaluate whether it will raise rates again, either in September or at the meeting which concludes Nov. 1.
In the bond market, many strategists and money managers are saying a higher-for-longer landscape is offering a great opportunity for investors to add income to their portfolios.
U.S. Treasury two-year notes finished the week yielding roughly 4.95%. That’s just shy of their 2023 peak, but more impressively, two-year yields are holding at their highest levels since 2006, when they briefly crossed the 5% mark. One would have to look back to the 1990s to see a sustained time period when these notes last offered such yields.
