The sharp drop in the US unemployment rate reported on Friday barely ruffled Treasuries. A few more months of such rosy news on the labour market would probably elicit a less sanguine response in the bond market. But we are sceptical the unemployment rate will decline sharply next year given the likelihood of weak economic growth. If so, the stance of monetary policy should remain exceptionally accommodative. We think this prospect, alongside falling inflation expectations and safe haven flows, will push the 10-year yield on Treasuries down to 1.5% from around 2.1% now.
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