By Matt Tracy
US 10-year Treasury yields climbed to the highest in nearly two months after a stronger-than-expected September employment report further weakened the odds of big rate cuts at the Federal Reserve’s remaining two meetings this year.
Nonfarm payrolls increased by 254,000 jobs in September, according to the Labor Department’s Friday employment report. Economists polled by Reuters had forecast a rise of 140,000 after a 142,000 increase in August.
The benchmark 10-year Treasury yield climbed to its highest since Aug. 9 and was last up 13.7 basis points (bps) at 3.981 percent.
The two-year US Treasury yield which typically moves in step with interest rate expectations, posted its biggest daily gain since April 10 and rose to its highest since Sept. 3. It was last up 22.5 bps at 3.925 percent.
The September payrolls increase came alongside a 4.1 percent unemployment rate, slightly lower than August’s 4.2 percent, and a tick up in hourly wages.
A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes seen as an indicator of economic expectations, was last at a positive 5.5 bps, narrowing from 13.7 bps late on Thursday.
The market has oscillated over the size of an expected second rate cut at the Fed’s November meeting. Despite a 50 bp cut last month, Fed officials have since signaled they are in no rush, a sentiment supported by Friday’s strong labor figures.
Expectations for a 25 bp cut in November skyrocketed following the data, with markets pricing in a 99.8 percent chance versus 65 percent late on Wednesday, with a 0.2 percent chance of no cut at all priced in, according to CME’s FedWatch tool
“Prior to today’s numbers the question for the market was whether the FOMC would cut by another 50 bps in November or only by 25 bps,” Eric Winograd, US economist at asset manager AllianceBernstein, wrote in a Friday report.
“Now the question is whether they will cut at all or will instead skip a meeting.”
Yields dipped earlier in the week when investors bought safe-haven Treasuries after Iran launched more than 180 missiles against Israel in escalating geopolitical tensions. Domestically, a dockworker strike at US ports which began Tuesday posed an inflation risk, but a deal was reached to end the action late on Thursday. – Reuters