US Treasuries gained, pushing yields lower, after a mixed report on the US labor market left traders holding tight to bets that Federal Reserve officials will lower interest rates this year.
The two-year Treasury note’s yield, which is more sensitive than longer maturities to changes in the Fed’s policy outlook, declined as much as 8 basis points to 4.62% — the lowest since April 1. While the US government’s June employment report showed job creation was above forecast, prior months were revised lower and the unemployment rate rose.
Derivative traders are steadfast on the odds of lower US borrowing costs in 2024. They are pricing in about a 70% chance that policymakers cut rates as soon as September. For all of 2024, the contracts imply a total of 48 basis points worth of rate reductions.
“It’s a Fed and US Treasury market friendly number,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “The Fed will be very vigilant around the employment market moving forward.”
Nonfarm payrolls rose by 206,000 last month and job growth in the prior two months was revised down by 111,000, the Bureau of Labor Statistics said Friday. The unemployment rate rose to 4.1% as more people entered the labor force, and average hourly earnings growth cooled.
While the data was supportive of bullish expectations in the bond market for the dawn of the Fed’s monetary easing cycle, it wasn’t enough to lock in the timing of the first rate cut. Policymakers have kept benchmark rates in a range of 5.25% to 5.50% for a year.
“What will cement September is really another round of data and more importantly what we see in terms of the inflation next week and obviously next month,” Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., said on Bloomberg Television Friday. “There are some cross currents that make it a little bit tricky.”
Next week’s economic data will include readings of consumer and producer price growth for June. Traders are also wary of political risk as President Joe Biden’s reelection odds falter after his recent debate performance.
Moves in the front end of the US Treasury yield curve outpaced those in longer maturities, triggering a re-steepening of the yield curve. Benchmark 10—year yields were down about 6 basis points to 4.30% and rates on debt with thirty years to maturity were off about 2 basis points.
The gap between two- and 10-year yields expanded to around 33 basis points.
“It’s very clear the market wants to be long into the political risks,” said Ian Pollick, global head of FICC strategy at Canadian Imperial Bank of Commerce. “Ultimately, the curve reaction makes sense. But whether or not the fall in yields can be sustained depends on external influences over the next few sessions, as this wasn’t a ‘bad’ report.”
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