After employment data, enthusiasm for rate cuts fades, boosting U.S. yields

(Bloomberg) — U.S. Treasury yields soared as traders lowered expectations for the Federal Reserve to ease monetary policy significantly next year after a better-than-expected jobs report.

The benchmark two-year yield, which is most closely linked to the U.S. central bank’s policy outlook, rose as much as 14 basis points, the largest one-day rise since June. The interest rates for each term increased by at least about 6 basis points on that day.

Swaps traders have scaled back their bets on the extent of the Fed’s interest rate cuts next year, predicting the rate of easing will be reduced to about 110 basis points from more than 120 basis points. The jobs report said nonfarm payrolls rose by 199,000 last month, compared with economists’ median forecast of 185,000. The unemployment rate unexpectedly fell to 3.7% as the labor force participation rate edged higher.

“It’s a good report,” Roth MKM chief economist Michael Darda said on Bloomberg TV. “The Fed will look at it, but they don’t really feel the need to accept an early rate cut next year because the market has already It’s priced.”

Friday’s repricing confirms the view of strategists that bond markets are moving well ahead of central banks as they price in rate cuts starting as early as March. Swaps traders on Friday reduced the probability of a March interest rate cut to about 40%. , from more than 50% before the report.

The trading flow that prompted the shift included several large futures block trades in the two-year Treasury contract and the covered overnight funding rate, a market rate influenced by the Fed’s rate.

In Europe, traders also reduced bets on interest rate cuts next year. Five rate cuts are still fully priced in, and the likelihood of a sixth rate cut is gradually declining. The odds of a first rate cut in March edged down to 60% from 72% on Thursday.

Hu Gang, managing partner of Winshore Capital Partners, said, “This report will prevent people from talking about interest rate cuts.” “The trend in the labor market is softening, but it is not as weak as people think,” and the same is true for inflation. Hu Jintao said that he does not support loose policies.

Safe purchase

Earlier this week, yields on many Treasury maturities had fallen to their lowest levels in months as bonds were considered safe to buy once the most aggressive tightening cycle in decades was over, even if a rate cut came later than expected. Since March 2022, the Federal Reserve has raised interest rates by more than 5.25 percentage points in response to accelerating inflation.

A weekly survey by JPMorgan Chase & Co. showed investors’ net long positions in U.S. Treasuries matched their largest record since 2010. The market rose 3.5% in November, the largest gain since 2008, erasing losses so far in October this year.

Rick Rieder, BlackRock Inc.’s chief investment officer for global fixed income, said on Friday that he prefers buying debt with maturities of three to seven years, anticipating that the Federal Reserve could start tightening policies around June. Cut interest rates and yields will fall.

The Fed’s final policy meeting of the year is next week, and while no changes to interest rates are expected, officials on Wednesday will update their forecasts for the next several years, known as the dot plot, for the first time since September. The median forecast predicts a 25 percentage point rate hike in 2023, followed by two rate cuts in 2024. Chairman Jerome Powell’s post-meeting comments could further influence market pricing.

“Most committee participants may not want to encourage market expectations for easing in the coming months,” Michael Feroli, chief U.S. economist at J.P. Morgan, said in a note. Economic forecasts are likely to show lower growth this year and Core inflation is lower next year, so we think these points will still show some moderation,” with the median forecast for 2024 falling to 4.875% from 5.125% in September.

Feroli expects the Fed to keep its policy rate unchanged next week, at the current range of 5.25% to 5.5%.

The day before the Fed’s decision, the government will release inflation data for November, with the key interest rate expected to fall from 3.2% to 3.1%. October’s drop was larger than expected, triggering a sharp rally in bonds last month.

Additionally, there will be auctions of three-, 10- and 30-year Treasury notes next Monday and Tuesday, which will create supply pressure and may temporarily deter buyers.

Priya Misra, a portfolio manager at J.P. Morgan Investment Management, said the shift in rate cut expectations was a setback, “but we think people will buy the dip.” “Not many people have the opportunity to buy a 10-year Treasury note at 5%,” But in a world of slower growth and slower inflation, even 4.25% is not a bad level. “

–With assistance from Aline Oyamada, Ye Xie and Michael Mackenzie.

(Updates yields, adds comments from economists.)

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