Bond Investors Could Get 'Second Chance' to Lock In High Rates

What You Need to Know

The distribution of bond yields suggests that many investors still expect a recession in 2023.
An exceptionally strong new jobs report for January has dented that assumption, however.
The coming weeks could be pivotal for bond markets as investors process good news, Schwab’s Kathy Jones says.

After a whirlwind week that delivered a closely scrutinized Federal Reserve meeting and an eye-popping jobs report rife with upward revisions, Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, says bond market investors may soon have a another chance to capitalize on elevated long-term rates.

In an interview with ThinkAdvisor shortly after the latest jobs report — which showed total nonfarm payroll employment rose by 517,000 in January and the jobless rate sank to 3.4%, its lowest level in more than 50 years — Jones said it is now “pretty clear that the U.S. economy is chugging along.”

Jones said she expected pressure from wage growth and resilient consumer spending will likely drive the Fed to continue raising benchmark interest rates throughout 2023.

While this is not a major diversion from the consensus view that had prevailed heading into this year, Jones said, those investors who expected rates to begin to fall before 2024 now have a harder case to make. An economy that adds more than 500,000 jobs in a given month is likely not on the brink of a recession, even if a significant portion of the January job growth reflects hiring that might have occurred in the second half of 2022.

More Jobs and Higher Wages Buoy Inflation Worries

“The jobs figure is eye-catching, but it is that high at least in part because of upward revisions for prior months,” Jones noted. “Still, the new report and the unemployment figures tell us the job market is healthier than many people believed, and there have been more jobs being created than we thought over the past few months.”

Also eye-catching is the robust and widespread wage growth seen in the latest data. Jones said there are clear signs that lower- and middle-income Americans continue to make significant wage gains, in no small part thanks to a labor shortage that stands little sign of immediate correction without major immigration reform. This is yet another factor supporting the view that inflation is still a major issue and that the Fed is set to maintain a hawkish stance, potentially for a lot longer than some expect.

A Pivotal Period for Portfolios

According to Jones, the next few weeks could be a pivotal period for bond markets in 2023, because the yield curve has clearly been affected by speculation that a recession, even one that is short and shallow, is inevitable in 2023. The widespread anticipation of a recession, Jones explained, seems to be one of the main factors that has caused the yield curve to invert, with more investors seeking to move into longer-term bonds that still have relatively attractive yields.