ACTV - February Jobs Report Mixed Yields Fall Amid Bank Turmoil VTC Holding Support

2023-03-10 09:55:25 ET

Summary

• Relief in hourly earnings and hours worked help lift stock market futures in the February employment report.
• The primary focus of markets appears to still be developments around SVB Financial and possible banking turmoil.
• A 25bps March rate hike is now seen as more likely than a half-point increase, helping to lift investment-grade bond prices.

The February jobs report revealed a strong 311,000 employment gain compared to the consensus forecast of just 225,000. The unemployment rate jumped to 3.6% from 3.4% in January which may have helped send markets into a bullish mood in the moments after the data hit the tape.

Also in the corner of the bulls was a lower-than-expected average hourly earnings monthly change of just 0.2% versus the 0.3% consensus. It was the 10th straight monthly headline NFP beat, however.

Yet Another Bigger-Than-Forecast Headline Employment Rise

Manufacturing and information-related job categories both featured job losses last month as the labor force participation rate rose a tick to 62.5%, above economists' forecasts. Leisure/hospitality was once again the biggest industry jobs gainer as demand for services remains hot. The U6 underemployment rate rose to 6.8%. The Household survey, used to gauge the unemployment rate, showed just a 177,000 February employment advance.

February Jobs Data

Good News: Average Hourly Earnings Growth Slowing

The initial response was a move lower in interest rates while stock market futures rose. The Fed swaps market now prices in less than a 50% chance of a 50-basis-point rate hike at the March FOMC meeting.

Turmoil around the Silvergate Capital liquidation and SVB Financial's stock price plunge also brought about a much less intense rate outlook in advance of the February NFP report.

Massive Banking Bludgeoning on Thursday

Putting it all together, the 10-year Treasury rate dropped under 3.8% for a moment to tag its lowest figure since Groundhog Day. The U.S Dollar Index dropped 0.4% following a loss on Thursday while oil prices rose above $76 on WTI.

10-Year Yield Backs Off From 4%

Earlier this week, the ADP private payrolls report was larger than expected while the JOLTS report was strong, too. Within the JOLTS data, however, the quits rate fell, which was perhaps the biggest takeaway. Then on Thursday, jobless claims for the previous week ticked up, helping to ease rate-hike fears. But reading too much into a single claims week is always risky.

Overall, the Fed's job remains tough as the employment landscape is not yet showing definitive signs of slowing down sharply, but there are signals that the labor market is easing just somewhat. This would have bullish implications for the global fixed-income market if employment and wage gains retreat. Let's home in on the U.S. high-grade corporate credit market.

According to the issuer, the Vanguard Total Corporate Bond ETF ( VTC ) tracks the performance of the Bloomberg U.S. Corporate Bond Index. It offers investors broad diversification to the investment-grade U.S. credit market with an intermediate-duration portfolio, holding the entire spectrum of maturities in fixed income outside of Treasuries. With a strictly high-credit quality portfolio, the fund is immune from changes in the junk bond market.

Regional Banks Account for a Small Share of the USD IG Market

VTC: Maturity Profile

Yield/Duration Matrix

The Technical Take

With just a 0.04% annual expense ratio and offering a current yield to maturity of 5.0%, the ETF gives holders a yield slightly higher than the broad treasury market without carrying a high degree of default risk. But with a duration of more than 7 years, VTC will see its NAV drop during yield rises. Lately, a steep increase in Treasury yields has led to about a 4% share price drop since the February high. I see support on the chart near $74 - should that level break, a test of the October low near $70 is in play.

With attractive yields and low bond market spreads, I'd simply overweight short-dated Treasuries rather than stretching for VTC's yield, though the fund is much more attractive today versus two years ago when it featured much higher interest rate risk. Overall, with prices stabilizing, I like allocating to parts of the bond market, so I'm a hold on VTC here since it may have established a low in October.

VTC: Corporate Bonds Test Support Near $74

The Bottom Line

The bond market may be improving, but the latest drop in yields appears more driven by a flight to quality. Inflation and jobs data are mixed but still leaning to the strong side which will force the Fed to continue hiking rates.

For further details see: