the bond report (what am i missing?)

[DcifrThs]

i feel like an idiot. and im definitely missing something here.

bond report (PIMCO bond report on cnbc)guy: "10 yr yields are down today as the employment report was revised upward"

if i am understanding what he said, it seems like employment is up. meaning unemployment is down.

thats a tightening of the labor market which means the demand/supply ratio is increasing (more demand/less supply due to relatively fixed labor market). that pushes the price for labor up.

increased wages puts upward pressure on inflation which means rates cuts are less likely and a static rate or (less likely) a rate hike is more likely.

thus bonds should be selling and prices droping, pushing yields up or at leaset keeping them stable...not having the 10yr trade at near lows for the year.

now that means there could be some lag and that i'm looking at the wrong part of the yield curve (i.e. tight market now means that in 10 yrs the cycle will be cutting rates to increase growth). but the bond guy directly linked the current employment report's upward revision to the purchasing of the 10yr that dropped its yield.

just talking this through: other downward pressures on the yield would be slowing growth, (to the point where a rate cut becomes more likely...in line w/ last 1.6% GDP increase in the latest quarter but countered by the latest employment report and the drop in unemployment), the chinese hardening their peg (they'd purchase dollars by selling yuan and using those dollars to purchase 10yr notes), and thats all i can think of off the top of my head.

thoughts? discussion? help? [img]/images/graemlins/confused.gif[/img]

Barron

[ItalianFX]

If employment is up, doesn't that push the price of labor down? There is no need to pay more for workers when in high supply.

I'm probably wrong though, just an idea.

[DcifrThs]

[ QUOTE ]
If employment is up, doesn't that push the price of labor down? There is no need to pay more for workers when in high supply.

I'm probably wrong though, just an idea.

[/ QUOTE ]

no. employment is up means there is more demand for workers. more jobs have been filled meaning that the supply for the next hire is diminished assuming a fixed labor market. in a thought process like this, we can assume a fairly fixed labor market (ratio of entrants/retirees or losses is close to 0). so increased demand (more workers being hired) and decreased supply (fewer workers for the next guy to hire) means higher wages.

EDIT: also, higher employment also correlates, by necessity, with fewer firings and implies that companies are expanding. this means also that they think they are poised for growth which should increase our expectations for future growth in the economy and yet again another downward pressure on bond prices which would push yeilds up not down....

so who are buying these 10 yr notes and why???

Barron

[Jcrew]

The upward revisions is relatively old news? I remember reading about it earlier in the week. The yields did go up the day the initial set of revisions came out but trended downward since. Bond market is thinking recession next year.

Also profits have been relatively strong this year for corps. Since business investing has not gone up that much(maybe they are thinking recession too?), where does all that capital go? Bonds and Stocks.

[ItalianFX]

I always assumed that those employment numbers meant the current situation. I didn't know they meant the change in employment? Maybe I'm reading it wrong, or explaining it in a confused way.

If demand goes up and supply goes down, doesn't that offset the prices?

Edit: I'm relatively new to Economics and I'm not much of a bond person, so I really have no idea what I'm talking about.

[NajdorfDefense]

Nothing is true 100% of the time. A former bond guy, my guess is thus:

Employment = more jobs revised upwards. This means FED is more likely to hike rates and less to cut. This means lower inflation, ceteris paribus. This means bond prices rise and yields fall. QED.

[DcifrThs]

[ QUOTE ]
Nothing is true 100% of the time. A former bond guy, my guess is thus:

Employment = more jobs revised upwards. This means FED is more likely to hike rates and less to cut. This means lower inflation, ceteris paribus. This means bond prices rise and yields fall. QED.

[/ QUOTE ]

ty but i dont think this is QED b/c you failed to mention the real time lag between FED raising rates and inflation falling. the falling yields are occuring now at t0

you have implied that at tx>0 the fed MAY hike rates to fight off inflation and at ty>x inflation will fall and bond yields will as well.

Barron

[DcifrThs]

[ QUOTE ]
The upward revisions is relatively old news? I remember reading about it earlier in the week. The yields did go up the day the initial set of revisions came out but trended downward since. Bond market is thinking recession next year.

Also profits have been relatively strong this year for corps. Since business investing has not gone up that much(maybe they are thinking recession too?), where does all that capital go? Bonds and Stocks.

[/ QUOTE ]

awesome. this is what i was hoping for. the expected recession means the fed will, in the future, be more likely to cut rates to reduce chances that growth slows too much or, as implied w/ the word "recession", go negative.

ty.

Barron

[DcifrThs]

[ QUOTE ]
I always assumed that those employment numbers meant the current situation. I didn't know they meant the change in employment? Maybe I'm reading it wrong, or explaining it in a confused way.

If demand goes up and supply goes down, doesn't that offset the prices?

Edit: I'm relatively new to Economics and I'm not much of a bond person, so I really have no idea what I'm talking about.

[/ QUOTE ]

np. ty for trying. these are the Qs that you should think about and i hope this will prove helpful to you.

all else equal:

supply goes down, that means something is becoming more rare. thus the reduced supply (and constant demand) lead to an increase in price.

demand goes up, that means that (assuming a constant supply) there is more demand than can be filled at the current price. the markets act to head fora price that will make demand = supply so the price of whatever it is that is now demanded will increase.

these effects work TOGETHER to push prices higher.

Barron

[Jcrew]

[ QUOTE ]

the expected recession means the fed will, in the future, be more likely to cut rates to reduce chances that growth slows too much or,


[/ QUOTE ]

This is a safe assumption if you are relying on what the Fed has done in the past 15 years or so. However if inflation rates persist above Bernanke targets, and if he wishes to remain consistent, there is a decent chance that the fed fund rate will not be reduce substantially. The primary goal of the Fed is to maintain price stability and the banking infrastructure. Reaizing potential growth is a secondary goal so the Fed may be more stringent in meting rate cuts.

Another constraint that they have that was not there during most of Greenspan's term is the rise of a real alternative for a global reserve currency, so there is a lower ceiling of the type of loosey goosey monetary policy they can employ. If the dollar ever loses reserve currency status(which for self-preservation reasons, the FED will NOT ever allow), rates will skyrocket. If the interest rate differentials are not there, the dollar will quickly lose value.