Bond investors are bracing for fresh signs of strength in the US labor market on Friday after Treasuries tanked on fears the Federal Reserve will hike interest rates higher than previously assumed.
Benchmark Treasury yields rocketed back through 4% this week as a report Thursday showed US companies added almost half a million jobs in June. Next up is the US Labor Department’s snapshot of employment conditions in June.
Sustained evidence of a robust US economy has repeatedly wrong-footed investors who previously bought bonds on the bet that growth would slow down after the Fed spent a year yanking up rates.
Now bonds are being sold on concern inflation will continue to hold north of the Fed’s 2% target, requiring policymakers to raise rates even further. The US selloff was mirrored elsewhere with Bloomberg’s index of global government bonds hitting levels last seen in the financial crisis.
“Looking at the market reaction overnight, stronger-than-expected jobs data, specifically non-farm payrolls, is very important to see how the market will price in the future Fed move,” said Sumitomo Mitsui Banking Corp. chief strategist Daisuke Uno. “That will probably boost Treasury yields further from here.”
He sees the potential for the US 10-year yield to even hit 6% this year.
The 10-year Treasury yield — the de-facto global bond benchmark — has broken above its recent downtrend, leaving chart watchers speculating over how high it could climb. A close above the 4.09% zone would open up the door to last year’s high of 4.34%, according to RBC Capital Markets strategist George Davis.
Friday’s keenly-awaited report is forecast to show nonfarm payrolls rose 230,000 in June after the prior month’s 339,000 gain, according to the median forecast of economists surveyed by Bloomberg. Unemployment is seen dropping to 3.6% from 3.7%.
What Bloomberg’s Strategists Say..
“Today’s data needs only to meet a test of sufficiency for the Federal Reserve to proceed with a rate increase later this month and put two-year Treasury yields on track to approach their next goalpost. At this stage, the question isn’t whether we get another hike so much as what will stop the Fed, ” Ven Ram, cross-assets strategist
“What the last month has shown us is that cash rates need to be closer to 5-6% in most global economies to slow the pace of growth,” said Kellie Wood, a money manager at Schroders Plc. “Until services and the labor market weaken we are likely to see yields push higher.”
On Friday, Australia’s 10-year yield surged to the highest since 2014, while the New Zealand equivalent hit the highest since 2011. Japan’s benchmark government bond yield edged back toward its ceiling of 0.5%. Treasuries extended losses.
The 10-year UK gilt is on track for the worst week since May.
“Some of the extreme moves look to be driven by capitulation from overstretched longs,” said Damien McColough, head of fixed-income research at Westpac in Sydney. But it’s hard to see what would spark a turnaround. “It doesn’t feel like a soft payrolls report would stop the rot.”
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