Treasury Yields Leap as Jobs Data Spur Bets on Bigger Fed Hikes
Treasury yields surged on stronger-than-expected US employment data that shore up the case for additional hefty central bank interest-rate increases.
The move was led by two- to five-year yields as swap contracts referencing Federal Reserve meeting dates repriced to levels indicating that another 75-basis-point increase in September is more likely than 50 basis points, the previous consensus. The two-year note’s yield rose as much as 22 basis points to 3.26%, the highest level in two weeks, versus 18 basis points for the 10-year.
A still-strong labor market even after the Fed’s four rate increases since March undercuts the outlook for the policy rate to decline next year, which has taken hold based on weakness in gauges of business activity, housing and consumer confidence.
“There is inconsistency in the data that’s throwing people for a loop,” said George Goncalves, head of US macro strategy at MUFG. “I wouldn’t chase rallies until it’s clear that inflation’s turned the corner and the job market is stalling; clearly it’s not stalling.”
The rate on swap contracts for the September Fed meeting rose as much as 12 basis points to 3.03%, some 70 basis points above the current effective fed funds rate of 2.33%. That implies a hike of at least 50 basis points is seen as definite and a two-in-three chance that it could be 75 basis points.
Contracts for early 2023 also repriced to higher rates, implying a peak of around 3.65%, about a quarter point higher than previously. The market continues to price in rate cuts later in 2023, however, emboldened by last week’s report that the US economy unexpectedly contracted during the second quarter. The GDP figure is subject to two revisions, however, and Fed officials have said they don’t believe the economy is in recession.
“Pricing in a Fed pivot for next year in August 2022 seems to be too early, especially as inflation numbers don’t show signs of abating,” said Kevin Flanagan, head of fixed-income strategy at Wisdom Tree. “Next week’s inflation data is very important and volatility will remain elevated for the Treasury market.”
The Consumer Price Index for July scheduled to be released Aug. 10 is forecast to show an ebbing of the year-on-year inflation rate from 9.1%, the highest since 1981, to 8.7%.
Treasury futures volumes in the selloff were around 50% above 20-day average levels and concentrated in two-year note contracts.
The surge in short-maturity yields briefly saw the two-year 44 basis points higher than the 10-year, a degree of inversion last seen in 2000, before stabilizing at around 39 basis points higher.
Yields across the Treasury curve remain below their 2022 highs, reached in June after the first major inflation surprise.
Still, next week’s auction of three-year notes has the potential to draw a yield higher than last month’s, which was the highest since 2007. The auction cycle also includes 10-year notes and 30-year bonds, where yields remain lower than the most recent monthly results.
Nonfarm payrolls jumped 528,000 last month following an upwardly revised 398,000 gain in June, Labor Department data showed Friday. The unemployment rate fell to 3.5%, matching a five-decade low. Wage growth accelerated and the labor force participation rate eased. The median estimates in a Bloomberg survey of economists called for a 250,000 payrolls gain and for the jobless rate to hold at 3.6%.
“This sort of data won’t make it likely the Fed will stop any time soon, and as the Fed keeps raising rates it’s going to drag the whole curve up along with it,” said Praveen Korapaty, head of US interest-rate strategy at Goldman Sachs Group Inc. “It’s very hard to see the Fed cutting aggressively unless there’s a deep enough recession.”
The Bloomberg dollar index jumped as much as 0.9%, with the US currency climbing versus all its major developed-market peers.
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