The yield on the 10-year Treasury note broke through to a new multi-year high of 3.03% on the final day of 2013, following the Federal Reserve’s December 18 decision to begin tapering down its bond buying program known as quantitative easing and the attendant sell-off in the U.S. government bond market.
Friday’s release of the December jobs report, however, sent yields tumbling 10 basis points in a single day, and they are now back below where they were when the tapering-induced sell-off began.
Last week, before the jobs report, we highlighted Citi’s Economic Surprise Index, which stood at its highest level in nearly two years headed into the release. The surprise index measures how much better or worse economic data progress relative to the expectations of market economists, so a high number means the data are blowing expectations out of the water.
That has been the backdrop for the last few months. Economic data releases have been doing just that, especially given how low expectations for near-term economic improvement were following the government shutdown that spanned the first two weeks of October.
Usually, when the economic surprise index reaches a certain level, however, it tends to roll over. This is because economists are likely to — in light of new information — incorporate the better-than-expected data into their forecasts for the following month’s data, which tends to shrink the gap between expectations and reality, causing the index to fall.
It works the same way for market participants, and strategists are beginning to warn that the downward thrust in yields could continue a little longer as a result, as Treasuries fall back into favour temporarily.
“It may now prove more difficult for data to meet the market’s heightened expectations, potentially leading to an extension of the post-payroll retracement move,” says Gennadiy Goldberg, a U.S. strategist at TD Securities.
“Data surprise indicators have already curled lower, suggesting that upcoming data could be crucial in determining near-term direction in rates. In particular, we suspect that this week’s softer headline retail sales, housing starts, and industrial production data could further pressures surprise indices lower, putting additional downward pressure on rates.”