Traders Rip Up Bets on Big Fed Cuts as Jobs Data Hits Bonds

Traders slashed their bets on the pace of future Federal Reserve interest-rate cuts after September US employment data blew past estimates and signaled a robust hiring trend.

The strong jobs report had traders shredding their aggressive bets for outsized rate cuts at the next policy meeting. Leading up to the data, the bond market had once more been running ahead of the Fed’s view on the trajectory of rate easing for this year.

It is a pattern that has been seen before. During the opening months of this year the rally in Treasuries was unwound as inflation and economic growth data surprised to the upside.

“The bond market is gravitating back to the Fed’s dot plot,” said Kevin Flanagan, head of fixed income strategy at WisdomTree, adding that traders find themselves once again having to recalibrate their bets amid data that points to a resilient economy.

The chance of a half-point rate cut in November was priced out, with the contract showing 23 basis points of easing now expected. Swap contracts tied to the outcome of future Fed meetings were pricing in only 53 basis points of rate cuts for November and December combined, a drop of more than 10 basis points after the jobs report. Traders are aligning their rate-cut bets with what Fed officials indicated last month via their updated forecasts.

TRADERS

“Just like the rally at the end of last year, Treasury yields needed to be validated by weaker data and it would not be a surprise to see the 10-year rise above 4% and head towards 4.15%,” said Flanagan. “The front end can hold below 4%, as the Fed can keep easing in line with their forecast.”