I had sort of assumed this morning that the stability of the unemployment rate in the June jobs report would prevent any panicky “OMG, quantitative easing is ending soon” market reaction. But apparently any positive news was just too good for the bond market, as Wonkblog’s Neil Irwin reports:
It’s a pretty good report but probably not something that should cause anyone to radically overhaul their assessment of where the U.S. economy is heading. But don’t tell that to the bond market. Bonds endured an epic sell-off Friday morning, enough to drive longer-term government borrowing costs to their highest level since the summer of 2011.
At 11:45 a.m., the cost for the U.S. government to borrow money for a decade was 2.68 percent, up 0.19 percentage points over Thursday’s level. That continues a runup in long-term interest rates of more than a full percentage point since May 1. In just two months, the cost of borrowed money has gone from incredibly cheap to only moderately cheap. Higher rates are translating into higher mortgage costs and higher borrowing costs for companies looking to expand, and generally should weigh against the pace of growth.
The reason for this simple math (Good jobs report = bond market sell-off = higher interest rates) is clear-cut enough. The Federal Reserve has been buying $85 billion a month in bonds since September, helping push bond and stock markets up while pushing long-term interest rates down. The better the economy looks, the sooner and faster the Fed will withdraw that help.
Yeah, but can’t investors make distinctions between roaring and tepid growth and adjust accordingly? Precisely not, says Irwin:
We’re in a market where markets are in an all-or-nothing mindset on the future path of policy. It’s frustrating for the Fed; the central bank’s top officials spent all last week trying to insist that they’re not going to withdraw monetary stimulus quickly and indeed that short-term rates are likely to stay near zero for quite some time to come. But words are cheap. Markets are in a mode where any comment about unwinding QE, or even a single good jobs number, leads to a dramatic rethinking of the direction of future policy.
This is, of course, deeply frustrating to those of us who would just like to see a full economic recovery. It seems that anything better than today’s half-recovery, with very high long-term unemployment and stagnant wages, is unsupportable; aside from all the other implements to a robust economy, the markets and the Fed together are determined to kill it if it starts happening, all the while pointing the finger at each other.
And the real losers in this lose-lose scenario, of course, are people so remote from the daily experiences of those who run the Fed and are involved in the the bond and stock markets so as to make their decisions feel like they are being imposed by warring tribes of space aliens hovering above a casually devastated landscape.