Bond yields fell on Monday, retracing some of the sharp bounce delivered by Friday’s much stronger-than-expected U.S. jobs report, as investors await the next major inflation report.
Meanwhile, the spread between 2- and 10-year yields narrowed to an intraday low of almost minus 43 basis points.
What’s happening
- The yield on the 2-year Treasury TMUBMUSD02Y, 3.185% slipped to 3.181% from 3.248% as of Friday afternoon. Yields move in the opposite direction to prices.
- The yield on the 10-year Treasury TMUBMUSD10Y, 2.784% retreated to 2.782% versus 2.838% on Friday.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.009% fell to 3.007% versus 3.065% on Friday.
- Last week, the 2-year rate jumped 35.1 basis points for its biggest weekly gain since June; much of that advance took place on Friday. Meanwhile, the 10-year rate posted a 19.6 basis point gain last week and the 30-year rate jumped 8.9 basis points for the week.
As of Monday, the 10-year to 2-year spread appeared poised to shrink to its deepest level below zero since August 2000, based on 3 p.m. levels, according to Dow Jones Market Data — signaling the bond market expects an economic downturn.
What’s driving markets
Investors are continuing to absorb Friday’s robust U.S. labor report and its implications for the pace of Federal Reserve interest rate rises as the central bank strives to tackle inflation at multi-decade highs.
News that the world’s biggest economy added 528,000 jobs in July, more than twice the number forecast, caused a sell-off in bonds and a spike in benchmark yields on Friday as traders added to bets that the Fed will be more aggressive at its next rate-setting meeting. Some of that yield bounce was being pared on Monday.
“While the strength of the labor market conveyed by the unemployment rate and jobs growth on its own likely implies an incremental improvement in the odds of a soft landing, the continued upward pressure on wages increases the likelihood that the Fed has to raise rates further into restrictive territory than the market currently expects,” said strategists Daniel Krieter and Daniel Belton of BMO Capital Markets.
Markets are indeed pricing in a 64.5% probability that the Fed will raise interest rates by another 75 basis points to a range of 3% to 3.25% at its Sept. 20-21 meeting. But before that, the central bank will consider two more monthly consumer price index (CPI) reports, the first coming on Wednesday.
Rubeela Farooqi, chief U.S. economist at High Frequency Economics, thinks the market is being too sanguine about the potential for interest rate cuts by the Fed next year.
Source: High Frequency Economics
“If this week’s CPI surprises to the upside, then an even larger, one-percentage-point increase will surely be on the table. We think market pricing of rate cuts next year are misplaced, given the current trajectory of wages and prices, even if the risks around growth are to the downside,” Farooqi wrote in a note.