Benchmark two-year Treasuries gained, sending their yields toward the biggest weekly decline since March, as signs the US job market is cooling spurred wagers that the Federal Reserve is done raising interest rates.
(Bloomberg) — Benchmark two-year Treasuries gained, sending their yields toward the biggest weekly decline since March, as signs the US job market is cooling spurred wagers that the Federal Reserve is done raising interest rates.
Yields on two-year notes declined as much as 11 basis points to 4.75% after the Labor Department report showed the unemployment rate jumped to 3.8%, a level last seen in February 2022 just before the Fed started raising rates. That’s put the yield on track to drop 28 basis points this week.
Ten-year yields erased a decline to trade around 4.12, still down on the week.
Interest-rate swaps showed that traders expected about 11 basis points of rate hikes through the Fed meeting in November, meaning they are pricing in less than a 50% chance of another rate increase before the central bank concludes the tightening cycle.
“This is the report the market was looking for,” said Jeffrey Rosenberg, a portfolio manager of the Systematic Multi-Strategy Fund at BlackRock Inc., on Bloomberg TV. “This is the reaction of pricing out the last hike the Fed suggested they may have to deliver. The labor markets are normalizing. That is the main message from today’s payrolls report.”
Rosenberg added that two-year Treasuries are a “screaming buy” as they have both high yields as well as the potential for benefiting from the Fed policy pivot. Longer-term bonds are less attractive because of uncertainties around inflation and risk premium, he added.
Shorter-term debt, which is more sensitive to the Fed’s policy, led the rally, resulting in a steeper yield curve. Yields on 30-year bonds climbed about 3 basis points to 4.24%, rising above five-year yields for the first time since Aug. 10.
Nonfarm payrolls rose by 187,000 after the prior two months were revised lower, while wage growth slowed. It is the third report this week showing signs of a softening job market, following weaker-than-expected job openings data and the employment figure from the ADP Research Institute.
This week’s rally eased some of the pain for bond investors after a month when they’ve seen a relentless selloff that sent the 10-year yields up to 4.36%, the highest since 2007.
The Treasury market could be more volatile than usual in Friday’s session as traders may head for an early exit ahead of the US Labor Day holiday, according to JPMorgan Chase & Co. Historically, the Treasury market is approximately 20-50% more volatile for a similar data surprise, in the two hours following payrolls releases on early-close sessions, according to the bank.
–With assistance from Katie Greifeld.
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