Treasury frenzy sends 10-year Treasury yield below 4.2%

Treasuries resumed gains Tuesday, pushing further Labor market slows down Strengthening speculation that the Fed will be able to take action lower interest rates next year to prevent a recession.

The benchmark 10-year Treasury yield, which briefly topped 5% in October, fell below 4.2% on Tuesday after data showed job openings hit their lowest level since 2021. However, concerns that the Fed is expected to ease too quickly have surfaced, highlighting the risks to traders’ expectations. That bet would pay off handsomely if a rate cut materializes, but could backfire if policymakers choose to keep borrowing costs higher for longer.

In a week dominated by labor market data, the Job Openings and Labor Turnover Survey, known as JOLTS, lagged all estimates in a Bloomberg survey of economists. The data comes just days before a key jobs report, with current forecasts showing employers adding 187,000 jobs in November.

Ian Lyngen of BMO Capital Markets said: “Overall, the employment data update dominated. Treasury bonds continued the bullish price action. From now on, the macro view will not change much before tomorrow’s ADP report.”

U.S. Treasuries also joined a rally in global bonds after one of the European Central Bank’s most hawkish officials said inflation had slowed “significantly.” The S&P 500 was little changed. Bank stocks fell after KeyCorp reported its non-interest income outlook. Large-cap stocks outperformed. — Apple Inc and Nvidia Corp rose at least 2.1%. Bitcoin breaks through $43,000.

Gennadiy Goldberg of TD Securities told Bloomberg Monitor on Friday that the rebound in the U.S. Treasury market is approaching worrying levels, especially on the back end of the curve.

On Tuesday, the 10-year Treasury yield fell 8 basis points to 4.18%.

“It’s been a long time since 4.70, and I’m certainly not complaining. But I do think you’re seeing a little bit of overstretch,” Goldberg noted. “If we get closer to 4%, I think I’m going to take my foot off the gas pedal. I think you have to be tactical.”

Peter van Dooijeweert of Man Group said that from an economic perspective, the Fed’s interest rate cut is likely to be a response to adverse conditions.

“If the Fed cuts interest rates next year, it will most likely be the result of poor economic conditions,” he said.

Swaps anticipating the outcome of the Fed meeting slightly increased the degree of easing they expect by the end of 2024, with the effective federal funds rate expected to fall to about 4.05% from the current 5.33%. The contracts also imply about a 60% chance of a rate cut in March.

Evercore’s Krishna Guha said the job opening data confirmed the Fed has made substantial progress in normalizing the labor market, but policymakers will view the data as more consistent with the “desired rebalancing,” Rather than “increased downside risks.”

“Against this backdrop, we are cautious about the market betting too much on rate cuts,” Guha said. “We find it difficult to imagine cutting rates before June without a recession and still seeing a soft economy. benchmark for three interest rate cuts.” Landing scenario. “

Lauren Goodwin of New York Life Investments said the Fed may now be at the end of a very aggressive monetary policy rate-raising cycle. But a faster pace of rate hikes doesn’t necessarily mean those effects will be felt sooner.

“Historically, it takes about 12 to 18 months for a rate hike to impact the economy and 18 to 24 months to impact the labor market,” she said. “The market won’t start until jobless claims are up and incomes are up.” Pricing recession risk.” Worse. Therefore, we will be keeping a close eye on labor market data this week. “

BlackRock said market optimism about the size of interest rate cuts next year may be too optimistic and recommended exiting long-dated bonds.

“We see the risk of these hopes being dashed. Higher rates and greater volatility dictate the new regime,” strategists including Wei Li and Alex Brazier wrote.

Meanwhile, the cost of buying protection against currency swings is rising as traders await a deluge of data and central bank meetings that could reveal the timing of a possible shift to rate cuts next year.

Eric Nelson, macro strategist at Wells Fargo Securities, said, “The shift in the central bank’s policy interest rate cycle from raising interest rates to cutting interest rates has led to increased interest rate volatility and ultimately has some impact on currency fluctuations.”

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