Bond Traders Eye Pivot Point for Rates After Cracks in Jobs Data
(Bloomberg) -- Bond investors are evaluating whether short-dated Treasury yields have seen their peak, as signs the US job market is cooling spur wagers that the Federal Reserve is done raising interest rates.
Yields on benchmark two-year Treasuries are on pace for their biggest weekly decline since March, dropping more than 20 basis points, according to a Bloomberg index. And interest-rate swaps now show a less than 50% chance of another rate hike this year.
While those moves pared after a key manufacturing gauge showed the continuing resilience of the US economy, the earlier Labor Department report has traders questioning how long that buoyancy can last. The unemployment rate jumped to 3.8%, a level last seen in February 2022 just before the Fed started raising rates.
“This is the report the market was looking for,” said Jeffrey Rosenberg, a portfolio manager of the Systematic Multi-Strategy Fund at BlackRock Inc., on Bloomberg TV. “This is the reaction of pricing out the last hike the Fed suggested they may have to deliver. The labor markets are normalizing. That is the main message from today's payrolls report.”
Rosenberg added that two-year Treasuries are a “screaming buy” as they have both high yields as well as the potential for benefiting from a Fed policy pivot. Longer-term bonds are less attractive because of uncertainties around inflation and risk premium, he added.
Shorter-term debt, which is more sensitive to the Fed's policy, outperformed, resulting in a steeper yield curve. Yields on two-year notes declined as much as 11 basis points to 4.75%. Those on 30-year bonds climbed as much as 9 basis points to 4.30%, briefly rising above five-year yields for the first time in weeks.
US INSIGHT: Macro Model Predicts 2-Year Yield Ending '24 at 4.2%
Nonfarm payrolls rose by 187,000 after the prior two months were revised lower, while wage growth slowed. It is the third report this week showing signs of a softening job market, following weaker-than-expected job openings data and the employment figure from the ADP Research Institute.
This week's rally eased some of the pain for bond investors after a month when they've seen a relentless selloff that sent the 10-year yields up to 4.36%, the highest since 2007.
The Treasury market could be more volatile than usual in Friday's session as traders may head for an early exit ahead of the US Labor Day holiday, according to JPMorgan Chase & Co. Historically, the Treasury market is approximately 20%-50% more volatile for a similar data surprise, in the two hours following payrolls releases on early-close sessions, according to the bank.
Investors are also preparing for a potential deluge of corporate bond sales next week, which is typically the case following the Labor Day holiday that marks the unofficial end of summer.
--With assistance from Katie Greifeld and Mark Tannenbaum.
(Updates with context from first paragraph.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.
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