Goldman: Payrolls Boost Yields, Not Enough To Set Upward Trajectory

Goldman Sachs note that "the strength of August's employment report (where the positive Household Survey surprise was especially notable) pushed yields higher Friday. This sell-off builds on the move seen early last month, with our factor model attributing the bulk of the increase in bond yields since the start of August to improved growth sentiment. Although it dominated conversation, the Fed's adoption of its new flexible AIT framework seems not to have mattered as much for nominal yields; while the inflation component did widen following the announcement, those gains partially dissipated over the past few days. Still, over the month, inflation compensation measures are wider and have done virtually all the work in lifting nominal yields, with medium-term traded inflation now closer to our near term target (we closed our long 5y5y inflation swap position for a profit of 25bp after hitting a trailing stop). Going forward we expect greater participation from the real component will be required for higher nominal yields, particularly at longer maturities. While we believe this is likely to play out over the medium term, uncertainty on a few fronts will likely continue to weigh on yields in the near term. First, while it has receded from the headlines, we note that there has not been much progress on a Phase 4 fiscal deal, and the odds of getting an agreement before the end of the month appear to be declining. Second, with the US election fast approaching, markets appear to be trading with caution, evidenced by the pickup in implied volatilities around the event in a range of asset classes. Finally, there continue to be questions about the trajectory on the public health front going into fall."