Inflation figures have replaced monthly nonfarm employment reports as the economic data considered most important for the bond market. Yields on 10-year Treasuries are now moving less on surprises in monthly payrolls than they do on the inflation numbers, officials said, adding attention has shifted from growth to inflation because of the economic cycle. To be sure, inflation has always been a primary concern for the market but it is the concern these days. Alex Li, interest-rate strategist at Credit Suisse First Boston, noted the correlation between payroll forecast errors and movements in 10-year Treasury yield has fallen from almost 100% to 75%, indicating payrolls now matter less to the bond market.
The bond market has been taking inflation figures more seriously since the Federal Reserve highlighted inflation as a concern for the first time in last month's Federal Open Market Committee statement. For example, the February index of Personal Consumption Expenditures, which was expected to be 1.8% year-over-year, came in at 1.6%; 10-year Treasuries rallied about six basis points. But even on the huge miss for March's employment data, which resulted in 110,000 new jobs, much less than the 250,000 expected, yields moved just three basis points. The change reverses the trend of higher volatility caused by economists' widening misses in payroll estimates (BW, 11/15).