U.S. Treasuries rallied after a mixed report on the U.S. labor market, pushing yields lower as traders held on to bets that Federal Reserve officials will cut interest rates this year.
The two-year Treasury yield, which is more sensitive to changes in the Fed's policy outlook, fell 8 basis points to 4.62%, the lowest level since April 1. Although the U.S. government's June employment report showed that the number of new jobs increased by more than expected, data for previous months were revised down and the unemployment rate rose.
Derivatives traders are holding firm on expectations for U.S. rate cuts in 2024. They see about a 70% chance that policymakers will cut rates as early as September. For the entire year 2024, contracts price in a total of 48 basis points of rate cuts.
"This is a Fed and Treasury-friendly data," said Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities. "The Fed will remain highly vigilant about the job market going forward."
The U.S. Bureau of Labor Statistics said on Friday that nonfarm payrolls increased by 206,000 last month, while job gains in the previous two months were revised down by 111,000. The unemployment rate rose to 4.1% as more people joined the labor force, and average hourly earnings growth slowed.
While the data supports bond market optimism about the start of the Fed’s monetary easing cycle, it is not enough to pin down the timing of the first rate cut. Policymakers have kept their benchmark rate in a range of 5.25% to 5.50% for a year.
“Really the key to confirming a September rate cut is going to be another round of data and more importantly what we see next week in terms of inflation and obviously next month,” Jeffrey Rosenberg, portfolio manager at BlackRock Inc., said Friday. “There are some cross-talks that make it a little bit tricky.”
Economic data next week will include readings on consumer and producer price growth for June. Traders also remained wary of political risks as Biden’s re-election odds fell after the recent debate.
Moves in the short-term U.S. yield curve outpaced those at the longer end, with the benchmark 10-year yield falling about 6 basis points to 4.30%, while rates on 30-year debt fell about 2 basis points.
The gap between 2-year and 10-year yields widened to about 33 basis points.
Ian Pollick, head of global FICC strategy at Canadian Imperial Bank of Commerce, said: "It is clear that the market wants to maintain a long position in the face of political risk. Ultimately, the reaction of the yield curve makes sense. However, whether the decline in yields can be sustained depends on external influences in the coming days, as this is not a 'bad' report."
The article is forwarded from: Jinshi Data
