Treasury linked ETFs have seen heavy selling today. The Ishares 20+ Year Treasury Bond ETF (TLT) and Ishares 7 to 10 Year Treasury ETF (IEF) have made new lows. The stronger than expected gain in June non-farm payrolls is an obvious driver of lower prices. Non-farm payrolls rose 195,000 compared to the trade estimate for a gain of about 160,000. Further there was a net upward revision of 70,000 jobs for April and May. Payrolls are rising at a level which has the trade looking for the Fed to start tapering QE in September. However, the real story may rest in the rise in hourly earnings. Hourly earnings for production and non-supervisory workers rose 5 cents in June to $20.14 and are up 2.5% y/y. Hourly earnings are starting to trend higher and imply the labor market is slowly tightening. Historically, the 10 year treasury yield has followed the trend in hourly earnings. The graphic following displays the relationship between the 10 year treasury yield and the year over year growth rate in average hourly earnings. The pickup in wage growth seems to suggest job creation just below the 200,000 per month level is enough to reduce slack in the economy and raise inflationary pressures. A continued rise in hourly earnings will give the Fed confidence that tapering QE is appropriate policy, and catch the attention of bond vigilantes.
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