Despite a weaker-than-expected September jobs report, Treasury yields, including the benchmark 10-year, remarkably rose on Friday, indicating that markets are still bracing for a “higher for longer” interest rate environment. While an October Federal Reserve rate hike seems less likely, experts suggest the overall trajectory for rates remains upward, with a December hike still a strong possibility amid concerns over inflation and energy prices.
In a surprising turn of events, Treasury yields advanced on Friday, shrugging off an unexpectedly soft September jobs report that initially seemed to douse expectations for a Federal Reserve rate hike next month. The move signals that the market’s “higher for longer” interest rate narrative continues to dominate.
The benchmark 10-year Treasury yield saw an increase of nearly 5 basis points, settling at 5.281%. This follows a week where the yield had already surged to levels not seen since 2002. Similarly, the 30-year Treasury yield rose by 2 basis points to 5.629%, and the 2-year Treasury yield, often considered the most sensitive to immediate Fed policy shifts, climbed 5 basis points to 4.839%.
For context, one basis point is equivalent to 0.01%, and it's crucial to remember that bond yields and prices move inversely.
The Bureau of Labor Statistics reported that nonfarm payrolls increased by a mere 29,000 in September, significantly underperforming Dow Jones economists' forecast of an 84,000 rise. Concurrently, the unemployment rate edged up to 4.2% from 4.1%. August's jobs count was also revised downwards to a gain of 133,000.
Yields initially dipped in response to the disappointing labor market figures, but buyers quickly re-entered the market, pushing yields back into positive territory by the end of the trading day.
According to Timothy Chubb, Chief Investment Officer at Girard Advisory Services, this upward movement is justified. "I don't think this report necessarily changes the story for the Fed," Chubb stated, adding, "I still think the trajectory from here is higher for longer."
Market participants are largely anticipating the Fed to keep rates steady at its October meeting, with the CME Group's FedWatch tool indicating a 77% probability. However, a rate hike in December remains a strong possibility.
Lindsay Rosner, Head of Multi-Sector Fixed Income Investing at Goldman Sachs Asset Management, concurs that an October hike is improbable but warns that the central bank’s tightening cycle might not be over. "Today's soft print argues against the idea that the labor market is retightening," Rosner commented. "One follow-up hike in December remains our base case; however, continued pressure by markets and moves higher in energy prices could force the Fed's hand this month as well."
The pressure on global government bonds eased somewhat following a sharp sell-off earlier in the week, with 10-year yields in major European economies falling by approximately 3 basis points. Nevertheless, the recent surge in yields globally underscores lingering concerns about persistent inflation and a hawkish stance from central banks, reinforcing expectations that interest rates will likely stay elevated for an extended period.
