(Bloomberg) — Key U.S. Treasury yields soared to 4%, a level last seen in August, after an explosive jobs report reduced the likelihood of another big rate cut by the Federal Reserve. is back.
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Bond prices fell on Monday, widening their decline from late last week after a surprisingly strong September jobs report. The yield on the 10-year note rose six basis points to 4.03%, and the yield on the two-year note rose as much as 10 basis points to 4.02%. The poor performance of short-term Treasuries caused a key part of the yield curve to briefly invert once again.
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The move reflects swirling doubts about the Fed’s next move. Short-term money markets are unlikely to see another half-point rate cut this year, and a quarter-point rate cut in November, which was once considered a certainty, is now priced in with about an 80% probability. For the first time since August 1, the implied rate cut by the end of the year is less than 50 basis points.
“While we have been expecting yields to rise, we now expect a somewhat more gradual correction,” Goldman Sachs Group strategists including George Cole said in a note. “The degree of strength in the September jobs report may have accelerated that process, leading to renewed debate about the scope of policy restrictions and, therefore, the potential extent of the Fed’s rate cuts.”
Monday’s open interest data, which tracks positions in the futures market, fell sharply across multiple contracts related to secured overnight lending rates, suggesting the unwinding of long positions. Meanwhile, a number of new hawkish hedges have emerged in the options market with the goal of cutting interest rates by one more quarter point this year.
Economists at Citigroup said in a Monday note that they expect the Fed, along with other Wall Street banks, to cut interest rates by 0.5 percentage point in November after strong September jobs data released Friday. He said he had given up on expectations for a point rate cut.
Short-term Treasury yields, which are more closely tied to the Fed’s monetary policy outlook, rose faster than longer-term Treasury yields on Monday, reversing the curve from its usual shape.
The two-year bond yield briefly exceeded the 10-year rate for the first time since Sept. 18, reversing the normalization trend that had gained momentum in recent weeks. Historically, the bond yield curve slopes upward as longer-term bonds have higher yields, and the Fed’s aggressive rate hikes have disrupted this norm for nearly two years.
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Following US bonds, European government bonds also fell. Germany’s 10-year bond yield rose 4 basis points to 2.25%, the highest level in a month, while Britain’s 10-year bond yield rose 6 basis points to 4.19%. .
The decline following Friday’s jobs report is just the latest in a year that has forced investors to readjust their expectations for the economy and Federal Reserve policy multiple times. U.S. services activity also caught traders off guard last week, beating all expectations and casting further doubt on the theory that the economy is deteriorating faster than feared.
Traders are now watching a series of speeches from Fed policymakers for further clues about the direction of interest rates. Minneapolis Fed President Neel Kashkari, Atlanta and St. Louis Presidents Rafael Bostic and Alberto Moussalem, and Fed Board Member Michelle Bowman will speak at various events Monday.
Markets are also awaiting the release of US inflation data later this week. The consumer price index in September is expected to rise by 0.1%, the first small increase in three months. Fed Chairman Jerome Powell said the outlook released by officials in conjunction with the September rate decision suggests a quarter-point rate cut in the last two meetings of the year.
“The Fed is not waiting for a true economic downturn to ease policy because a recession is not needed to bring inflation to an acceptable level,” said Dario Perkins, managing director at TS Lombard. Ta. “Everyone should be aware by now that the Fed is cutting rates preemptively.”
Bloomberg strategist says…
“There is no longer a path to a 50bp rate cut at the November Fed meeting. Bond markets are still adjusting to new pricing realities.”
—Alice Andres, U.S. interest rate strategist. Read more about MLIV.
–With assistance from Liz Capo McCormick, Edward Bolingbroke and Christine Flanagan.
(Updates rates globally and adds open interest data and Economist Fed call changes.)
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