The beginning of the year brought challenges for bond investors, which intensified on Friday due to robust employment figures. These figures stand in contrast to the earlier anticipation of the Federal Reserve lowering interest rates within the year.
Following the release of the March employment report, which showed a significant increase in US payrolls and a decrease in the unemployment rate, the market's expectations for a Federal Reserve rate cut before September diminished.
As a result, Treasury yields neared their peak for the year, with the 10-year rate surging by up to nine basis points to approximately 4.40%. The yield on the two-year note also hit its daily high following comments by Dallas Fed President Lorie Logan, suggesting it's premature to consider rate reductions, a sentiment echoed by other Fed officials earlier in the week.
The likelihood of a rate cut in June, previously anticipated by major Wall Street firms, was adjusted to about 52%. The expectations for rate cuts throughout 2024 also saw a reduction, aligning less with the Fed officials' median forecast from last month.
"The current data does not support an immediate move towards rate cuts by the Fed," stated Peter Tchir, head of macro strategy at Academy Securities Inc. He added that with the combination of strong data and increasing oil prices, the 10-year yield could potentially exceed 4.5% to 4.6%.
Later in the day, Treasury yields across all maturities had risen by at least six basis points, with two-year yields leading the increase. Despite these movements, yields on five- to 30-year maturities remained below the highs earlier in the week, which were influenced by solid economic indicators, rising oil prices, and hawkish remarks from Fed officials Raphael Bostic and Neel Kashkari.
Other aspects of the employment report, such as a slight increase in labor-force participation, could help mitigate wage inflation, according to Randall Kroszner, a former Fed governor and professor at the University of Chicago Booth School, during a Bloomberg Television interview. This increase in participation rate surpasses the consensus estimates.
However, the robust job creation data, alongside other strong US economic indicators at the year's start, led Pacific Investment Management Co. (Pimco) to revise its Fed policy forecast to only two quarter-point rate cuts this year, down from two or three, as noted by economist Tiffany Wilding in a report.
At the year's start, there was a broad expectation that the Fed's previous 11 rate hikes would not only address inflation but also lead to economic downturns, prompting rate reductions. However, the slowdown in inflation progress, continued strong growth metrics, and sustained investments in stocks and corporate bonds indicate the economy may not yet need lower rates.
"The data slightly leans against bonds, solidifying the chances of delayed rate cuts," remarked Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. He also mentioned that the reduced recession risk has led investors to seek higher returns.
ING Financial Markets strategists had cautioned that the 10-year yield might revisit the 4.5% mark seen last November before a significant rally at the year's end. Similarly, options market traders had positioned for a potential move to nearly 4.5% and overall higher yields.
Next week offers Treasury investors the chance to purchase three- and 10-year notes and 30-year bonds during auctions. The demand at these auctions, potentially increased by higher yield levels, will be crucial. The bond market continues to benefit from the belief that yields are adequately high compared to the Fed's effective overnight rate.
A survey by BMO Capital Markets on investor intentions following the employment report showed that 57% of investors would buy if yields rose due to the jobs data, an increase from a six-month average of 47%.
Upcoming inflation data, including the March consumer price index, will be closely watched. February's CPI figures exceeded estimates, pushing Treasury yields higher. Market-based inflation expectations have also risen alongside oil and gasoline futures prices, significant components of the CPI.
