An employment report that sees the most jobs gain since March 2007 and the yield on the benchmark 10-year Treasury note climbs to 3.94 percent, the highest since June.
Those two major indicators that emerged Friday can possibly signal the return of higher interest rates on mortgages and other consumer financial products later in the year.
But the Federal Reserve’s monetary policy holds the most influential piece of the puzzle. While its “extended period” posture for its historically-low federal funds rate remains in place, the market speculation is shifting to whether that pledge will survive through the end of 2010.
Another brewing factor: Thursday, April, 1, marked the end of the Fed’s $1.25 trillion purchase program of mortgage-backed securities initiated at the height of the financial crisis. A primary goal of the program was keeping mortgage rates low.
Much of what transpires with interest rates depends on the “sustainable recovery” premise as it applies to the still broadly-mild rebound from the Great Recession.
U.S. Treasury Secretary Timothy Geithner yesterday adamantly asserted that the unemployment report, which showed payrolls increasing by 162,000 jobs – the third gain over the past five months – was a sign of the gradual return of the private sector.
Although economists had forecast an additional 190,000 jobs, the report was mostly viewed as positive.
But Geithner was on the defensive in an interview with Bloomberg T.V., dismissing criticism from Republicans and others that the jobs report was tainted by the nearly 50,000 temporary workers hired by the government for taking the census.
“We have an economy now that’s been growing at a significant rate for three quarters, and we’re seeing the private sector create jobs on a significant scale,” Geithner said.
More significantly for the overall economic outlook, is how the financial markets respond.
Yesterday, a key barometer to higher interest rates on a broader scale surfaced with the performance of the Treasury 10-year note. The yield on the 10-year note rose 9 basis points to 3.94 percent. Investors perceive the 10-year note as a benchmark for the longer term bond market. And it serves as a bellwether to subsequent rates on mortgages and other loan products.
Although bond yields remain low from an historical perspective, private investors are less likely to buy the Treasury’s new debt offerings until higher yields are in place. That trend would drive up longer term rates.
Much is riding on the private market to kick in now that the Fed has wound down its historic mortgage debt purchase program.
The central bank’s purchases involved mortgage bonds guaranteed by government-sponsored financing giants Fannie Mae and Freddie Mac or the federal agency Ginnie Mae.
Yields on Fannie Mae and Freddie Mac mortgage securities rose to their highest level three months. According to Bloomberg, Fannie Mae’s 30-year fixed-rate mortgage bonds climbed 0.05 percentage point to 4.56 percent on April 1, the highest since Dec. 28.
