Key US Treasury yields hit 4% for first time since August on Federal Reserve rethink
This comes as money markets no longer forecast another half-point cut this year, while a quarter-point reduction in November is now priced at an 86% probability
KEY US Treasury yields are back at 4 per cent, as the country’s strong jobs report undercut chances for another big interest rate reduction from the US Federal Reserve. The last time the yields reached such levels was in August.
Bonds dropped on Monday (Oct 7), extending a plunge late last week, following surprisingly robust September payrolls data.
The 10-year yield rose as much as four basis points to 4.01 per cent, while the two-year yield was up nine basis points to the same level.
The moves reflect swirling doubts over the US Federal Reserve’s next moves.
Money markets no longer forecast another half-point cut this year, while a quarter-point reduction in November – that was seen as certain – is now priced at an 86 per cent probability.
For the first time since Aug 1, there are fewer than 50 basis points of cuts implied until the end of the year.
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“We’ve expected higher yields, but anticipated a somewhat gradual adjustment,” Goldman Sachs strategists said.
“The extent of strength in the September jobs report may have accelerated that process, with renewed debate on the extent of policy restriction, and in turn, the likely depth of Fed cuts.”
The underperformance in shorter-dated US Treasuries – which are more sensitive to monetary policy – has left a key part of the yield curve inverted once again, with two-year yields trading above 10-year rates for the first time since Sep 18.
Historically, bond yield curves slope upwards with longer notes paying higher yields. This is a norm that was disrupted for about two years, as the US central bank hiked rates aggressively.
European bonds followed US Treasuries lower. The German 10-year yield rose four basis points to 2.25 per cent – the highest in more than a month. Its UK equivalent rose six basis points to 4.19 per cent.
The sell-off following Friday’s jobs data is just the latest twist in a year, which has forced investors to recalibrate their expectations for the economy and Fed policy numerous times.
US services activity also caught traders off guard last week. It exceeded all forecasts, and cast further doubt on theories that the economy was deteriorating more rapidly than feared.
Traders are now looking ahead to a series of speeches from policymakers at the Federal Reserve for further clues on the path for rates. Key members will speak at different events on Monday.
The market is also waiting for US inflation data later this week. The consumer price index is seen rising 0.1 per cent in September – its smallest gain in three months.
Fed chair Jerome Powell has said projections issued by officials, alongside their September rate decision, point towards quarter-point rate cuts at the final two meetings of the year.
“It doesn’t need a recession to get inflation to tolerable levels, so the Fed is easing policy without waiting for genuine economic weakness,” said Dario Perkins, managing director at TS Lombard. “By now, everyone should have realized the Fed is cutting rates pre-emptively.” BLOOMBERG
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