Why The Fed Needs You To Sell Your Bonds by Gary D. Halbert

by Gary D. Halbert

July 8, 2014


1.  US Gains 288,000 Jobs in June – Unemployment 6.1%
2.  32 States Have Not Regained All Lost Jobs
3.  Long-Term Interest Rates Are Down This Year – Why?
4.  The Problem: A Shortage of Long-Dated Bonds
5.  Hope You Had a Happy 4th of July Weekend!


Today I will attempt to explain why longer-term interest rates have fallen significantly this year when almost everyone expected rates to rise. This discussion focuses on the fact that there is a shortage of Treasury securities in the marketplace today, especially in maturities of 10 years or longer. The shortage is due to a combination of factors that I will discuss below.

The bottom line is that when Treasuries are in short supply and demand is strong as it has been this year, buyers bid up the prices of these securities. When bond prices go up, yields fall. This is why the Fed would like investors to sell their bonds to help solve the shortage.

It is doubtful that this trend of lower interest rates will continue if the economy continues to gain momentum. This should be an interesting letter for those of you who own bonds and pay attention to interest rates.

Before I get to that discussion, let’s take a look at last Thursday’s surprising employment report for June. The economy created significantly more jobs than expected (288,000) last month, and the unemployment rate fell to 6.1%. I will break down the internals of the report just below.

While the national economy has finally recovered the apprx. nine million jobs it lost during the Great Recession, 32 states have not. We will look at the states that have still not recovered, as well as some that are booming. Let’s get started.

US Gains 288,000 Jobs in June – Unemployment 6.1%

The economy added 288,000 jobs in June, and the unemployment rate fell from 6.3% to a nearly six-year low of 6.1% as more people entered the labor force and found work, the government reported last Thursday. The strong jobs report suggests the economy is gaining momentum.  The consensus was for 215,000 new jobs, so the report was clearly stronger than expected. So far in 2014 the economy has gained an average of 231,000 jobs a month, 19% faster than the 2013 pace of 194,000.

Fed Bonds Jobs added

Employment gains for May and April were also revised up by a combined 29,000 jobs, the Labor Department said. In June, virtually every major industry added jobs, led by professional services, retail, restaurants, health care, finance and manufacturing. Average hourly wages, rose 6 cents, or 0.2% to $24.45. Wages are up 2% over the past 12 months. The average workweek was unchanged at 34.5 hours.

The report last week did have some blemishes, however. The labor-force participation rate was flat at 62.8%, a 35-year low, for the third consecutive month. The number of people who had to take on a part-time job for financial reasons jumped by 275,000, offsetting a similarly sized decline in Americans who’ve been without a job six months or longer.  And the fewest young adults entered the labor market in June in four years.

After climbing to a 15-month high in May, planned job cuts announced by US companies in June dropped 41% to 31,434, the lowest level of the year. However, in the 2Q, a total of 124,693 job cuts were announced, up 3% from the 121,341 job cuts announced in the 1Q and up 9.5% from the same period last year.

32 States Have Not Regained All Lost Jobs

Based on last Thursday’s employment report and the upward revisions of the April and May new jobs numbers, the Labor Department tells us that the US economy has finally regained the apprx. nine million jobs lost in the Great Recession. That’s a milestone, I suppose – just to get back to breakeven at the national level.

Yet five years after the Great Recession officially ended, most states still haven’t regained all the jobs they lost, even though the nation as a whole has. Actually, there are 32 states that still have fewer jobs than when the recession began in December 2007 – evidence of the unevenness and persistently slow pace of the recovery.

Even though economists declared the recession over in June 2009, Illinois is still down 184,000 jobs from pre-recession levels. New Jersey is down 147,000. Both states were hurt by layoffs at factories. Florida is down 170,000 in the aftermath of its real estate market collapse.

The sluggish job market could weigh on voters in some key states when they go to the polls this fall. A Quinnipiac University poll out last Wednesday found that voters named the economy by far the biggest problem facing the United States.

The states where hiring lags the most tend to be those that were hit most painfully by the recession. They lost so many jobs that they’re still struggling to replace them all.

Nevada, which suffered a spectacular real estate bust and four years of double-digit unemployment, has fared worst. It has 6% fewer jobs than it did in December 2007. Arizona, also slammed by the housing collapse, is 5% short.

By contrast, an energy boom has lifted several states to the top of job creation rankings. North Dakota is the #1 example and has added 100,000 jobs since December 2007 – a stunning 28% increase, by far the nation’s highest. It’s like its own little gold rush.

The state has benefited from technology that allows energy companies to extract oil from shale. Not surprisingly, the capital of North Dakota, Bismarck, has the lowest unemployment rate of any American city: 2.2% as of May.

Also benefiting from the energy boom is Texas, which has added more than one million jobs since December 2007, an increase of nearly 10%. For comparison, the nation as a whole has added only a net 113,000 jobs over that period.

Jobs in Washington D.C., where lobbying is an all but recession-proof occupation, are up 49,000, or 7% since December 2007. The gain was led by a 10% increase in hiring by private employers. Wall Street’s recovery from the financial crisis has helped New York gain 237,000 jobs since the recession ended, an increase of nearly 3%.

Dan White, senior economist at Moody’s Analytics, says many states are struggling because the recession wiped out solid middle-class jobs – in manufacturing and construction – that haven’t returned. He says it will take a stronger housing recovery to put significantly more people back to work building houses, installing wiring and plumbing and selling furniture and appliances to new owners of homes.

Housing has rebounded somewhat since bottoming a couple of years ago. But the industry’s recovery has slowed. Home construction is running at barely half the pace of the early and mid-2000s. And the United States has lost nearly 1.5 million construction workers since the end of 2007 – a 20% plunge. Nevada has lost half its construction workforce.

Factories have added 105,000 jobs over the past year, but manufacturing payrolls remain down 1.6 million, or 12%, since the start of the recession. Manufacturing jobs in Michigan, for example, hit bottom

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