Following a robust employment report, the prospects of further substantial interest rate cuts by the Federal Reserve have diminished, leading to a rebound in major U.S. Treasury yields to 4%, the lowest since August. On this trend, bond markets fell, extending their decline due to the unexpectedly strong September employment data. The 10-year Treasury yield rose by 6 basis points to 4.03%, and the 2-year Treasury yield increased by 10 basis points to 4.02%. The poor performance of short-term Treasuries resulted in a brief inversion of a crucial part of the yield curve, reflecting market uncertainty about the Fed's next move.
The monetary market no longer forecasts a half-percentage-point rate cut this year, and the probability of a quarter-point cut in November is now around 80%. This marks the first time since August that expectations have shifted away from a 50-basis-point cut by year's end. Goldman Sachs strategist George Cole noted that while yields are expected to rise, this adjustment may be expedited by the strong September job data, sparking a renewed debate on policy constraints and Fed rate cuts.
Data from open interest contracts, which track futures market positions, showed a significant drop in several contracts linked to the secured overnight financing rate, indicating a retreat from long positions. Meanwhile, new hawkish hedgers in the options market are targeting another quarter-point rate cut this year.
Citi economists forecast a quarter-point rate reduction in November, following the strong September jobs data, aligning with other Wall Street banks dropping predictions for a half-point cut. The 2-year Treasury yield, closely tied to Fed monetary policy outlook, rose faster than the long-term yield, disrupting the normal yield curve shape. For the first time since September 18, the 2-year yield briefly surpassed the 10-year yield, reversing a trend toward normalization.
European bonds followed US Treasuries down, with Germany’s 10-year yield up 4 basis points to 2.25%, and the UK’s 10-year yield up 6 basis points to 4.19%. The stock market dropped following last week's jobs data release, the latest in a series of adjustments investors have had to make regarding the economy and Fed policy. Trade activity in the US service sector also surpassed expectations, challenging the theory of a rapid economic downturn.
Traders are now anticipating speeches from Fed policymakers for further direction on interest rates. Market players also look to the upcoming US inflation data, with predictions for a 0.1% rise in September's consumer price index, the smallest in three months. Fed Chair Jerome Powell has indicated that forecasts and the September rate decision point to a quarter-point rate reduction in the Fed’s final two meetings of the year.
Dario Perkins, Managing Director at TS Lombard, suggests that inflation can be reduced without a recession, prompting the Fed to ease policies. Alyce Andres, Bloomberg US Rates Strategist, remarked on the shift in market pricing, eliminating the possibility of a 50-basis-point cut at the Fed's November meeting.
