Jobs report has bond market on pins and needles

Bond experts, like everyone else in the financial markets, consider Friday's May payroll number crucial to bond prices and interest rates. “Friday is an important number,” said Rick Rieder, chief investment officer of fixed income investments at BlackRock Inc. “A lot of portfolio re-balancing has been done in anticipation of it.” “All eyes are on the payroll number coming out Friday,” said Thomas McLoughlin, co-head of U.S. wealth management research at UBS AG. “The two big drivers of higher bond yields are expectations of stronger growth and expectations of a shift in monetary policy.” Emphasis on the latter. In an environment in which monetary policy has become the most important factor in financial markets, interpreting economic data has become a more challenging task for market analysts. It's not just about divining how the market — or policymakers at the Federal Reserve — will react to the payroll number, but also how the market thinks the Fed will react to the data. “Monetary policy is now the most important thing for investors across global markets,” Mr. Rieder said. “It dwarfs the importance of the economic data.” So, for example, a strong payroll number would normally be considered positive for the economy and riskier assets such as stocks. But if it encourages any of the Fed governors to suggest the central bank should start reducing its asset purchases because of the improving economy, the market could bail out on risky assets again — possibly retreating to the safety of Treasuries. Ironically, rates, which have been inching up of late, could fall in that scenario. Conversely, if it's a weak number, market players may take comfort in the idea that the Fed, led by Chairman Ben S. Bernanke, will continue its ultra-loose monetary policy to keep a lid on long-term rates to juice the economy and stock market. It's safe to say that whatever the payroll number is on Friday, the market will be fixated on any comments or signals from the Fed that a change in policy is in the offing. “There's a widespread expectation that the Fed will taper its asset purchases — it's a matter of when. The difference today from 1994 is that the Fed is more transparent and people parse every statement and every press conference,” Mr. McLoughlin said. “Mr. Bernanke is trying to make the Fed more transparent, but the result is that we get the peanut gallery interpretation of what he's going to do.” So a move in either direction could mean a lot more volatility in the bond markets.