Treasury ETFs rallied and yields dropped sharply Friday after the disappointing August employment report and downward revisions triggered speculation the Federal Reserve may not begin tapering its bond purchases at the policy meeting later this month.
The iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) rose more than 1% after the Labor Department said the U.S. economy added 169,000 jobs last month, lower than expected.
Also, the July and June figures were revised lower. The labor force participation rate fell to 63.2%, the lowest level since 1978, MarketWatch reports.
Yields on 10-year Treasury notes pulled back Friday after nearly touching 3% this week – they were as low as about 1.6% in early May. Treasury yields have spiked in recent months on talk the Fed will begin winding down its purchases of bonds and mortgages, sometime before the end of 2013.
However, Friday’s lackluster jobs report, downward revisions and falling labor participation rate put those expectations in doubt.
“The Fed is certainly going to want to get more information before they make this move, particularly given how violent the financial-market reaction has been to tapering,” said Julia Coronado, based chief economist for North America at BNP Paribas, in a Bloomberg report. “You’re not going to play Russian roulette with the U.S. economy and risk another backlash in interest rates.”
“Even the Federal Reserve would conclude that the employment trend is moderating and for that reason alone they probably will have second thoughts about tapering bond purchases this month,” added Cary Leahey, senior advisor at Decision Economics, in a Reuters article.
Full disclosure: Tom Lydon’s clients own TLT.