A rough start to the year for bond traders risks getting worse with the release of key US employment data on Friday.
Treasury yields remain near their highest levels of 2024 ahead of the report, which is forecast to show that solid jobs growth moderated in March. Strong economic data — along with rising oil prices and improving financial conditions — have challenged the Federal Reserve’s plans to cut interest rates by three quarter points by year-end, with some officials floating the potential for no reductions.
It’s been a painful spell for bond investors as a result. Many came into the year expecting the Fed would cut aggressively and that Treasuries would benefit. Instead, US debt lost about 1% last quarter. Positions that will gain in value if yields rise have been in demand in the options market over the past two days as traders take further steps to protect themselves.
“We have long argued that markets have been too quick to write off the US economy and to assume that benign inflation would tee up an extended monetary easing cycle,” said Mark Dowding, chief investment officer at RBC BlueBay.
While still pricing in two cuts, bond traders have decided that a third reduction is closer to a coin toss.
Earlier in the week, a broader range of positioning indicators including futures open interest and JPMorgan Chase & Co.’s Treasury client survey showed proliferating wagers on higher yields, although a portion of those appear to now have been exited as they paid off.
The yield on 10-year Treasuries was up two basis points at 4.33% as of 10:15 in London. It rose to 4.43% earlier this week, a new high for the year.
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%.
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