Market Review
January 2010

As the final month of 2009 unfolded, treasury and mortgage rates pushed higher, breaking through ranges that had held for several months.  Yields on 10-yr treasuries had remained at or below 3.60% since August, but the latest push higher brought the yield back to the 3.90% area.  To this point, the 4.00% yield has not been seriously tested and it provides a new ceiling for the time being. 

Leading into, and following, the January 8th release of the December unemployment report, yields have stabilized and a push back to the middle of the new range has brought 10-yr yields back below 3.80%.  The December change in non-farm payrolls showed an unexpected drop of 85,000 jobs.  Expectations were for a flat reading following a slight growth in November.  The headline unemployment rate remained at 10.0%, so not much there for either bulls or bears to hang their hats on.

As far as the 10% unemployment rate goes, while having a reported one in ten people out of work sounds bad enough, the real rate is likely much higher.  The survey used to calculate the number asks people whether they are currently working or currently looking for work.  Given the length and depth of the current downturn, many individuals that were previously looking for work have dropped from the search and others may have accepted part-time employment when they'd rather work full-time.  When these individuals are added to those counted as out of work, the unemployment rate balloons to around 17%.

Given that all market participants are aware of the understatement of the unemployment rate, it then becomes a matter of how the various numbers will affect Fed policy and rate expectations going forward.  Recent statements by Fed policy makers have not added much clarity to the Fed's intentions nor to what triggers they may be looking for before beginning the unwinding of the rock-bottom Fed Funds rate. – Lindsay Hill