December U.S. jobs report could deliver reality check to bond-market bears

December U.S. jobs report could deliver reality check to bond-market bears

As a sharp selloff overtakes the U.S. bond market, some warn it may be wise to take profits on short positions ahead of what is likely a dismal December jobs report from the Labor Department on Friday.

The December employment numbers could check bond-market bears rejoicing in the 10-year Treasury yield’s push above 1% this week. Indeed, the potential for a disappointing employment outcome due to the intensifying COVID-19 pandemic could serve as a reminder that the consensus trade of higher long-term bond yields will have a bumpy road ahead.

Read: U.S. economy might lose jobs in December for first time since onset of pandemic

“The market has priced in a good amount of optimism,” said Patrick Leary, chief fixed-income strategist for Incapital, in an interview. “We’re seeing daily hospitalization rates climb, and for a lot of the country we’re in the darkest days.”

Expectations for further fiscal stimulus to combat the impact of coronavirus pandemic under the incoming Biden administration and a Democratic-controlled Congress has lifted inflation expectations along with bond yields.

The 10-year Treasury note yieldBX:TMUBMUSD10Y was at 1.083% on Thursday, its highest levels since mid-March and close to 20 basis points higher than where it traded at the end of last week.

Equities have also taken heart from the prospect of more fiscal stimulus, with the S&P 500

and Dow Jones Industrial Average

up more than 1% this week.

Leary said he had been positioned for a bond-market selloff through put options on Treasurys running into the Georgia runoff elections for the U.S. Senate on Tuesday, won by the Democrats. Put options are a bet on lower prices as they give holders of the option the right, but not the obligation, to sell the underlying asset at a specific price by a certain date.

See: U.S. bond market could face ‘taper tantrum’ risk after Georgia Senate runoffs, says Jefferies

But the potential for a worse-than-expected jobs report is now leading him to ease away from his bearish stance. Leary said he was ready to cash in some of his put options.

MarketWatch-polled analysts estimate the Bureau of Labor Statistics will report only 50,000 job gains in December, a month that coincides with the recent coronavirus resurgence after pandemic-fatigued Americans congregated during the holidays and local governments implemented shutdowns to limit the spread of the disease.

Recent employment data have fed concerns that the labor market, the foundation of the U.S. economy, did stumble at the end of 2020.

Private-sector jobs shrunk by 123,000 in December. The latest reading of weekly jobless claims remain elevated at 787,000. And data on Thursday showed employment activity among services firms contracted for the first time in three months.

Check out: Fed’s Harker sees ‘significant slowdown’ in U.S. economy in first three months of year

To be sure, markets have been all too ready to shrug past signs of economic distress in favor of the brighter outlook for later this year when widespread vaccine distribution is expected and a large swathe of the U.S. population has been inoculated.

And some argue a poor jobs report could, in fact, bolster risk assets and push yields further if it raises hopes that Washington will pass further fiscal stimulus.

“Markets now look at weak data and anticipate more fiscal stimulus out of a Democratically controlled Congress and White House,” said Ed Al-Hussainy, senior global and interest rate analyst at Columbia Threadneedle, in an interview.

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