U.S. Economy Adds Jobs, but Interest Rates Continue Falling

The U.S. added 252,000 jobs last month and the unemployment rate dropped two-tenths to 5.6%. The participation rate, the proportion of workers employed or actively seeking work, declined one-tenth to 62.7%. The broad assessment is that this is “another good employment report” and is “solid” due to the large number of construction jobs, 48,000, added last month. But if this is such good news, why are investors piling into U.S. Treasurys, the safest of all assets, instead of taking risk? Though favorable economic news usually drives yields up, in the hours following the “strong” employment report, the yield on the ten-year Treasury note declined around four basis points. However, the relationship between employment gains and changes in Treasury yields is often complicated by other factors (the correlation between the unemployment rate and the ten-year note’s yield is about -27% looking back thirty years). Global deflation concerns appear to be the driving force behind lower Treasury yields. The correlation between inflation, as measured by the Personal Consumption Expenditure price index, and ten-year Treasury yields looking back fifty years is around 70%. “Global deflation, and its market impact, is the theme of the moment,” the Wall Street Journal recently noted. Lower oil prices, now below $50 a barrel, have exacerbated deflationary concerns. No matter how many jobs the U.S. creates, low domestic inflation and the potential for global deflation will likely continue to hold U.S. Treasury yields down for the foreseeable future.