Treasuries Soar as Traders Pull Forward Fed Cuts After Jobs Miss

Treasuries surged and traders ramped up bets on how soon the Federal Reserve will begin to cut interest rates this year after a US labor-market report trailed estimates.

Benchmark two-year Treasury yields, most closely linked to the outlook for the Fed’s monetary policy, plunged as much as 17 basis points to 4.71% as traders reacted to the job creation figures. Traders now see a Fed cut as soon at September, after earlier Friday seeing that in November, and are pricing two 25-basis-point reductions this year.

Treasury yields for maturities out to seven years remained down at least 10 basis points near the lowest levels since mid-April. The surge in US bonds began in the wake of US central bank chairman Jerome Powell’s comments this week being perceived as dovish, delivering the biggest two-day drop for two-year yields since January on Wednesday and Thursday.

“It’s a Goldilocks report that will please the Fed and please the market,” Mohamed El-Erian, president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, said Friday on Bloomberg Television.

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Following Friday’s data, swaps traders lifted the overall degree of Fed policy-rate reductions expected this year — moving it to about 50 basis points from around 41 basis points earlier on Friday.

US employers scaled back hiring in April and the unemployment rate unexpectedly rose. Nonfarm payrolls increased by 175,000, the smallest gain in six months, unemployment ticked up to 3.9% and wage gains slowed.

Treasury yields have stabilized as traders digest the figures, amid recent indications that some may be in bearish wagers that they may not be ready to abandon. The two-year note’s yield rebounded to about 4.77% as of 9:25 a.m. New York time.

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US interest-rate volatility remains elevated and is expected to remain high as each new piece of economic data has the potential to alter expectations for Fed policy. Swaps traders this year have priced in as many as six and as few as one quarter-point Fed cuts in 2024.

“The April payroll report was unambiguously positive for the rates market,” said Gennadiy Goldberg, head of US interest rates strategy at TD Securities. “It plays right into Powell’s pushback on rate hike expectations, which suggested the market was getting ahead of itself on hawkishness. But the market will continue to lurch from data point to data point as investors refine the odds of cuts in 2024.”

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