Employment gains while low rates remain
Corporates | Kennett Square, PA
SummaryWhile the employment data showed optimism, Treasury yields reflect limited expectations of economic growth and inflation. In this low rate environment, corporates continue to employ extend-and-blend structures for previously hedged floating rate debt and forward hedging of future fixed rate debt.
During a week in which the Nasdaq reached a record high before retracing somewhat, other risk assets were mostly positive last week. The data focus was on employment, as some good news penetrated the ongoing economic struggles associated with the COVID-19 pandemic. Initial jobless claims, which had risen for two consecutive weeks, came in just shy of 1.2 million, marking a reduction in U.S. individuals applying for first-time unemployment benefits. Similarly, continuing jobless claims fell by about 800 thousand to 16.1 million. Of note, the initial jobless claims number has now totaled over the 1 million mark for 20 consecutive weeks.
While the reduction is a sign of an economy that is slowing the pace of shedding jobs, the high number will continue to take its toll on consumption in the United States. Positive moves were somewhat tempered by sector-specific impacts and questions on the sustainability of the current growth trajectory. There was an increase in the long-term unemployed, and many of the of the added jobs are believed to be from people who were furloughed or temporarily laid off, meaning people were returning to their prior jobs, not being offered new ones. The jobs data highlights some of the sector-specific impacts we have seen across our client base, with the impacts of COVID ranging from increased forecast uncertainty across most lines of business, to dramatic decreases — and dramatic increases — in business activity, depending on the sector. The largest gains from a sector perspective this month occurred in leisure and hospitality (+592k) and government employment (+301k). Leisure and hospitality was almost entirely comprised of food services and drinking places, which has gained almost 3.5 million jobs since May, but is still 2.6 million lower than February.
Questions around the sustainability of positive employment data trends will continue to drive market impacts and stimulus discussions. Despite marks of optimism given the employment data, Treasury yields still reflect limited expectations of economic growth and inflation over the medium term. The 10-year Treasury in particular hit a record low of 0.5069% on Tuesday before rebounding somewhat at the end of the week. With the persistent low rate environment impacting both the short and long end of the curve, corporates continue to take advantage of strategies that include extend-and-blend structures for previously hedged floating rate debt and forward hedging of future fixed rate debt.
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