(Bloomberg) — U.S. Treasury yields are back at 4%, a level not seen since August, after a jobs report forced traders to reassess the outlook for monetary policy.
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Bonds fell on Monday, extending their decline late last week, after surprisingly robust September payrolls data undermined the chances of another big rate cut from the Federal Reserve. The ten-year yield rose by four basis points to 4.01%, while the two-year yield rose by eight basis points to 4%.
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These moves reflect swirling doubts about the Fed’s next move. On swaps, a 25 basis point cut is no longer fully priced in for the Fed’s next decision in November, and for the first time since August 1, less than 50 basis points of cuts are implied through the end of the year.
“We expected higher rates, but expected a somewhat gradual adjustment,” Goldman Sachs Group Inc. strategists including George Cole wrote in a note. “The level of strength in the September jobs report may have accelerated that process, with renewed debate over the extent of policy cuts and, in turn, the likely depth of Fed cuts.”
European bonds followed lower than US government bonds. The German 10-year yield rose four basis points to 2.25%, the highest in more than a month, while the British counterpart rose six basis points to 4.19%.
Bond traders brace for ‘no landing’ after jobs surprise
The sell-off following Friday’s jobs data is just the latest twist in a year that has forced investors to repeatedly recalibrate their expectations for the economy and Fed policy. Activity in the US services sector also threw traders off guard last week, beating all forecasts and casting further doubt on theories that the economy was deteriorating faster than feared.
The underperformance of shorter-dated US government bonds, which are more sensitive to monetary policy, has brought an important part of the yield curve back to the brink of inversion. Historically, bond yield curves have sloped upward, with longer notes yielding higher yields, a norm that was disrupted for nearly two years when the Fed aggressively raised rates. The curve began to normalize last month, with two-year yields falling below the ten-year yield.
Traders are looking to a series of speeches from Fed policymakers for further clues on the interest rate path. Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael Bostic, St. Louis Fed President Alberto Musalem and Fed board member Michele Bowman will speak at various events Monday.
The market is also awaiting US inflation figures later this week. The consumer price index rose by 0.1% in September, the smallest increase in three months. Fed Chairman Jerome Powell has said officials’ projections, in addition to their September interest rate decision, point to quarter-point rate cuts at the last two meetings of the year.
“A recession is not needed to get inflation to acceptable levels, so the Fed is easing policy without waiting for real economic weakness,” said Dario Perkins, managing director of TS Lombard. “By now everyone should have realized that the Fed is lowering interest rates pre-emptively.”
(Updates with Fed prices in paragraph three.)
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