A rough start to the year for bond traders just got worse as data showed a buoyant US labor market with few of the stresses that could prompt the Federal Reserve to lower interest rates.
Treasury yields rose and traders ceased fully pricing in a Fed rate cut before September in the wake of another hot reading on job creation. US payrolls rose in March by the most in nearly a year and the unemployment rate held steady.
US government bonds yields approached their highest levels this year, with the benchmark 10-year rate jumping nine basis points to about 4.40% as the fresh dose of data doused hopes that the Fed would move to reduce rates soon.
Swap contracts that predict the central bank’s rate decisions cut the probability of rate cut in June to about 52%, and to less than 100% for July. For all of 2024, traders now see only about 67 basis points of rate reductions — lagging behind the three quarter—point reduction Fed officials have signaled.
“This data certainly doesn’t give the Fed the impetus to cut anytime soon,” said Peter Tchir, head of macro strategy at Academy Securities Inc. “Treasury yields are poised to continue to move higher. The strong data and rising oil prices likely means the 10—year yield is headed to crack 4.5% to 4.6%.”
Treasury yields of all maturities were at least four basis points higher on the day at around 9:30 a.m. in New York — short of year-to-date highs reached by five- to 30-year yields earlier in the week in response to strong economic data, rising oil prices and hawkish comments by two Fed officials.
The selloff was limited by other elements of the employment report including a rise in labor-force participation with the potential to temper wage pressures. The participation rate inched up to 62.7% from 62.5%, exceeding consensus estimates of 62.6%.
“The key thing in this report is labor force participation” and that “it’s impact offsetting some of the wage concerns,” Randy Kroszner, former Fed governor and currently a professor at the University of Chicago Booth school, said on Bloomberg television. “I think that’s kind of the good news” and why there’s “a more modest reaction in the bond market from a headline beat.”
Strategists at ING Financial Markets warned ahead of the jobs report release that the benchmark 10-year yield is set to revisit the 4.5% level last seen in November before a massive year-end rally kicked in. In the options market, traders also were set up a few days ago with wagers targeting a move to almost 4.5% and for overall higher yields.
What Bloomberg Intelligence Says..
“It’ll be difficult for the Fed to make the case to cut rates if they are truly data dependent. We’ll look at 4.5% as the next important technical level for 10-year Treasury yield.” — Ira Jersey
Any further move higher in yields could present a buying opportunity for longer-term investors. The bond market continues to benefit from conviction that yields are sufficiently high relative to the effective overnight rate determined by the Fed.
That was the finding of BMO Capital Markets’ monthly survey of investor intentions following the employment data. The share of investors that said they would buy if the data cause yields to rise was 57%, compared with a six-month average of 47%.
“The data are modestly bearish for bonds in that they cement the probabilities of a later start to rate cuts,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott. The data also reduce the risk of a recession, leading investors to demand higher rates of return.
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