Why Bond Yields Should Remain Low And Capped For Now

by: Bondsquawk, CFA

By Rom Badilla

Fueled by a drop in hiring plans, sentiment by small businesses in the U.S. failed to increase in September, suggesting stalling of improvements in both the labor markets and the economy. The National Federation of Independent Businesses released the results of its Small Business Optimism, which fell by one tenth of a point to 92.8 in September. The lackluster reading failed to meet expectations as the median of economists' forecasts was at 93.5. In addition, the lack of improvement is evident as the latest print continues to remain near its six month average of 92.9. With 691 firms responding to the survey, there were some noteworthy changes in the components that raise concern toward economic growth.

NFIB Small Business Optimism Index & Recessions

The net percentage of business owners surveyed that are planning to hire in the next 3 months plunged to 4% from 10% in September. The component of the Small Business survey continues to remain weak at this point in the recovery from a historical perspective. With the September data which marks the 39th month of the current recovery, the six month average of the Plans to Hire component stands at 5.5%. Comparatively, the six month average at the same point in time in the recovery following the recession of 2001 was at 16.0%. Similarly, the Plans to Hire average following the 1990 to 1991 recession was at 11.5%. The net percent is defined by the NFIB as the number of firms reporting increases minus the number of firms reporting decreases.

NFIB Small Bussiness - Plans to Hire & Recessions

In addition, small businesses owners are reporting less activity in business investment which coincides with the slowdown in other indicators. The net number of firms reporting Increased Capital Spending fell from 24% in the previous month to 21% in September. The six month average of this component is at 23%.

Other components were mixed. The net number of firms reporting Higher Selling Prices fell from 9% in the previous period to 6% in September. The decline suggests less demand as businesses are less likely to raise prices. The net number of firms showing a Plan to Increase Inventory was unchanged at -1%.

While the components were generally negative in September, the outlook for small businesses picked up according to the survey results. The net number of firms Expecting a Better Economy improved to 2% from -2% in August and -8% in July. While the September figure is barely positive, keep in mind that it is the highest reading since the first quarter of 2011. Also, the Good Time to Expand outlook index increased by 3% on a net basis to 7% in September and is now above the six-month average of 6%. The net number of businesses seeing Positive Earnings Trends picked up from -28% in August to -27%.

All in all, the sideways action in the Small Business Optimism Index may be viewed as a reflection of the muddle through economy. As mentioned earlier, small businesses are the backbone of the U.S. economy as they are a major part in the job growth machine. The drop in the employment components is a concern as job growth for the U.S. economy remains lackluster as evident by last Friday's Non-Farm Payrolls. Despite this, the outlook for small businesses have improved and may pickup further if economic growth begins to accelerate. Of course, the European Debt Crisis and the Fiscal Cliff are major headwinds that may prevent that from happening in the months ahead. For now, today's survey results are consistent with a slow growth economy. As a result, bond yields should remain low and capped for the time being.

According to Trade Monster's Bond Trading Center, the yield on the 10-Year U.S. Treasury is at 1.71%, down 4 basis points from the previous close.

Disclaimer: The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.