Treasury yields continued to decline for the third consecutive day due to weaker than expected economic data, plunging stock markets and bearish commentary from Bill Gross. The U.S. Department of Labor reported that initial unemployment claims rose to 440,000, the highest level in almost five years. In a separate report, ADP Employer Services reported that private companies reduced payrolls by 33,000 last month. Increasing job losses have heightened concerns that the economy is worsening.
Also negatively impacting the markets were comments made by Bill Gross, manager of the world's biggest bond fund at PIMCO. He opined that the government needs to start buying assets to stem a bourgeoning “financial tsunami.” A process of “delevering,” where banks are shrinking and cutting off lending, is sapping demand for loans, bonds, stocks and commodities, driving down prices of assets of even “impeccable quality,” Gross said. The decline may continue until the government steps in as a buyer.
On the day, Treasury yields declined across the curve with two- and 10-year benchmark yields dropping by eight basis points. The yield on the 10-year Treasury has reached the lowest level in five months. The major equity indices plummeted by 2.5% despite the continued drop in crude oil and commodity prices. Crude closed the day at $107.9/bl and the CRB closed lower for the sixth consecutive trading session. In fact, since July, crude oil has declined by 26%; the CRB has lost over 100 points or 20% of its value. Declining commodity prices, while positive for inflation, are discounting a global slowdown.
Early this morning, Non farm Payroll for August reported -85,000 versus expectations of -75,000. This is the eighth consecutive decline in employment. Moreover, prior jobs for the past two months were revised downwards by 58,000. Since the beginning of the year, the U.S. economy has shed 600,000 jobs. The Unemployment Rate jumped to 6.1% (versus 5.7%), the highest level since 2003.
The market reaction has been as one would expect. Equities in pre-market activity are trading sharply lower and Treasuries continue to rally, with yields declining across the curve.
In terms of portfolio strategy, we continue to recommend an overweight in the MBS sector. Within MBS, we favor mortgage securities that have limited extension risk and good call protection. To that end credit unions should focus on seasoned 10- and 15-year pass through securities, as well as hybrid ARMs and select CMO structures.
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