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Huge Bond Flattening Continues, What Does It Mean?

Despite employment rising by over 1 million in November and the unemployment rate falling to 4.2%, the rally in treasuries continues.
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One Day Change in Treasury Yield 2021-12-03

Strange Jobs Report 

This morning I reported Jobs Gains Less Than Half the Consensus But Unemployment Rate Drops Steeply

  • The BLS reports 210,000 jobs 
  • Employment soared by 1,136,000 
  • The unemployment rate fell by 0.4 percentage points

Comments Via Email From Bloomberg

  • To sum it up: It's "one of the weirdest reports I've ever seen," said Danny Dayan, CIO at Dwd Partners. 
  • "WOW... OK. This number was all over the place," said Dennis DeBusschere of 22V Research.
  • "The latter is much more reliable," Ian Shepherdson at Pantheon Macroeconomics said (aka: payrolls). One of the reasons for the difference could be that the household results are catching up to gains in the employer survey earlier this year.

This morning I commented "The surprise of the day was the enormous gain in the household survey employment by 1,136,000 vs a payroll gain of of only 210,000."

But the key takeaway was the bond market reaction. Yields fell across the board.

Relentless Flattening 

Change in treasury Yield Since October 1 2021-12-03

Wow Factor

If you want to discuss "wow" please note the three-year bond yield is up 37 basis points while the 30-year long bond yield is down by 35 basis points.

That's a relative flattening of 72 basis points. The bond trade of the month has been to buy the long bond and sell the 3-year note. 

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Treasury Yields 2021 to Date 

Treasury Yields 2021 to Date 2021-12-03

Treasury Yields October to Date 

Treasury Yields October to Date 2021-12-03

Chart Comments 

  • The peak inflation scare despite constant howls all year long was on March 18 and 19 when the long bond yield peaked for the year at 2.45%.
  • Since then, the yield on the long bond has fallen 76 basis point to 1.69%.
  • The 3-year note is the most sensitive to rate hikes. It has risen from 0.33% to 0.90% a rise of 57 basis points.
  • Note that an inversion between the 20-year bond and the 30-year bond started on October 28 and has persisted every day since.
  • Watch the gap between the 7-year and 10-year notes. I expect that to invert next.

What's It Mean?

If you are paying attention instead of screaming about inflation, the answer is pretty easy.

By the time the Fed finishes tapering and gets around to hiking (will that even happen?) there will not be much inflation. Inflation is in the rear view mirror. That is the clear message from the bond market!


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