Treasury yields staged an unexpected rally on Friday, recovering from an initial dip that followed a significantly weaker-than-anticipated September jobs report. The surprising upward movement in yields suggests that despite the slowdown in job growth, the Federal Reserve's hawkish stance and the 'higher for longer' interest rate narrative are still holding sway over market sentiment.
The benchmark 10-year Treasury yield climbed nearly 5 basis points to 5.281%, having earlier in the week touched levels not seen since 2002. Similarly, the 30-year Treasury yield added 2 basis points, reaching 5.629%. The 2-year Treasury yield, which is highly sensitive to the Fed's policy decisions, also rose by 5 basis points to 4.839%. It's important to remember that one basis point equals 0.01%, and bond yields move inversely to their prices.
The Bureau of Labor Statistics revealed that nonfarm payrolls increased by a mere 29,000 in September, a stark contrast to Dow Jones economists' prediction of an 84,000 gain. Furthermore, the unemployment rate edged up to 4.2% from 4.1%, and the August jobs count was revised downwards to a gain of 133,000. This report, typically a strong indicator for Fed policy, initially caused yields to fall, as it appeared to reduce the likelihood of a near-term rate hike.
However, the market's reaction reversed course, with yields moving back into positive territory throughout the trading session. Timothy Chubb, chief investment officer at Girard Advisory Services, remarked on this resilience, stating, "I think that's the right move because I don't think this report necessarily changes the story for the Fed. I still think the trajectory from here is higher for longer."
Traders are now pricing in a 77% chance that the Federal Reserve will maintain current rates at its October meeting, according to the CME Group's FedWatch tool. Despite this, there remains a strong expectation for a potential rate hike at the December meeting.
Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, echoed the sentiment that an October hike is improbable but cautioned that the hiking 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."
Across major European economies, pressure on global government bonds eased slightly after a week of sharp sell-offs, with 10-year yields decreasing by about 3 basis points. The broader rise in yields globally reflects enduring concerns about persistent inflation and the unwavering hawkish tone from central banks, fueling expectations that interest rates will likely remain elevated for an extended period.
