Treasury yields surged as surprise strength in the US labor market forced traders to pare back their wagers on Federal Reserve interest-rate cuts this year.
The two-year Treasury note’s yield, more sensitive than longer maturities to changes in the Fed’s policy outlook, rose nearly 15 basis points to 4.87% after the US government’s May employment report showed job and wage growth exceeded expectations. Yields of all maturities rose at least 10 basis points.
Derivative traders, meantime, reduced their expectations for Fed rate reductions starting as soon as November, now seeing only about an 80% chance — versus fully priced-in odds ahead of the economic data. For all of 2024, the contracts now imply a total of only 37 basis points of US central-bank rate cuts, versus 47 earlier in the session.
“This data keeps the resilient employment narrative alive another month and leaves the onus on CPI to drive the dot-plot,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets, referring to next week’s consumer price index and Fed officials’ update of their quarterly rate projections, known as the dot plot.
US policymakers will meet for a two-day policy meeting next week and release an update to their rates forecasts. In March, officials signaled three quarter-point cuts to come this year. Strategists widely expect them to downgrade this to two — or even only one — cut in 2024.
BMO’s Lyngen said he expects short-term Treasury yields to keep moving higher in the wake of the US jobs report. Nonfarm payrolls advanced 272,000 last month, a Bureau of Labor Statistics report showed, beating all projections in a Bloomberg survey of economists. The unemployment rate increased to 4% from 3.9%.
Also troubling bond traders was that average hourly earnings climbed 0.4% from April and 4.1% from a year ago.
“Despite some market chatter about imminently slowing growth, there’s not much hard data to support the idea,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott. “Labor market demand is high, corporate profits are growing, and consumer incomes continue to move higher. There is absolutely nothing in today’s report which gives the Fed a reason to cut, and plenty of things which give them a reason to hold off.”
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