Good news is bad news – at least for today. Stocks fell and bond yields jumped to their highest levels since 2023 after the Bureau of Labor Statistics (BLS) reported the number of jobs was much higher than expected on Friday.
Employers added 256,000 workers to their payrolls in December, according to the BLS, much more than the 165,000 economists had expected.
The unemployment rate fell to 4.1% from 4.2%, compared to unchanged economists’ expectations.
Bond yields, already on an upward trajectory over the past four months, hit new highs after the jobs data was released.
The yield on 10-year government bonds rose as much as 10 basis points to 4.79%, the highest level since late 2023, when the yield peaked at around 5%.
Likewise, the yield on the 30-year government bond rose by as much as 7 basis points to 5%, which puts it just 10 basis points below its 2023 peak.
Exchange-traded funds that track government bonds, such as iShares 20+ Year Treasury Bond ETF (TLT)fell (bond yields and prices move inversely). TLT fell 1% to its lowest levels, bringing its year-to-date losses to more than 2%. The ETF is down more than 8% in 2024.
The decline in bonds reflects a stronger outlook for growth in the US economy and a diminishing prospect of a significant rate cut by the Federal Reserve this year. CME’s FedWatch tool suggests the US central bank may cut rates just once in 2025.
Bonds weren’t the only asset class to struggle on Friday after a higher-than-expected jobs report. The SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) it fell by 1.9% and 2.2%, respectively, at the lowest level.
At the day’s low, the S&P 500 fell 4.6% from its December closing high, while the Nasdaq-100 fell 6.2%.
SPY and QQQ each returned about 25% in 2024 after jumping 26% and 55% in 2023, respectively.
After back-to-back years of enormous gains, some investors are concerned that stocks could be in for a pullback, especially since valuations for U.S. stocks are historically rich. Perhaps high interest rates could be the catalyst that triggers the next stock market correction.
On the other hand, while rising rates worry investors, as long as the economy and corporate profits continue to grow, investors may look beyond the jump in yields.
