A sense of euphoria is catching on in the US Treasury market as investors tally up signs that the Federal Reserve is finally done with its most aggressive monetary policy tightening since the early 1980s.
The yield on 30-year government bonds has plunged by nearly 40 basis points in the days since Jerome Powell and his colleagues reinforced speculation that the central bank is finished hiking interest rates. It’s the biggest three-day drop for the yield – as of noon New York time – since the onset of the coronavirus pandemic in early 2020.
It’s been a wild ride this week for bond traders who have also seen the Treasury unveil smaller-than-expected bond supply plans and key data – which the Fed has vowed to heed – that suggest the economy is starting to cool. Rates on 2- to 10-year debt all fell more than 10 basis points in Friday’s session after US job growth slowed by more than expected and the unemployment rate rose to an almost two-year high.
“We’ve now had a much weaker-than-expected jobs number,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. Assuming key yields stay near Friday’s lows, “the bear market is over.”
For bond traders, the employment report was a key piece of evidence that the Fed has room to keep interest rates on hold in December and begin preparing for a cut next year. Interest-rate derivatives show traders are pricing in more than 100 basis points of monetary easing for 2024.
That stands in contrast to a growing cohort of asset managers who warn that yields could re-test recent highs if the economy appears to keep on expanding. Fed officials and traders alike are looking ahead to future data releases – including readings of inflation – that could give the Fed reason to raise rates further.
MARKET DRIVER
The payroll data on Friday, though, is only the latest market driver in a week of high-impact announcements. The Treasury on Wednesday increased its planned sales of longer-term securities by slightly less than most dealers expected in its quarterly debt-issuance plan, spurring a rally in bonds amid the possibility a wave of bigger supply will soon come to an end.
Treasuries continued gaining later that day when the Fed left its key rates unchanged and Powell said the central bank would be “proceeding carefully” based on incoming economic indicators, the evolving outlook, and the balance of risks. On Wednesday, the 30-year yield closed lower by almost 17 basis points, while the spread between 5- and 30-year bonds saw a 10-basis points daily swing.
That portion of the US yield curve flattened Thursday after the Bank of England kept interest rates unchanged and predicted the economy faces over a year of stagnation, prompting a rally in European rates.
Those moves were exacerbated as traders bought Treasuries to cover their short positions, said James Camp, managing director at Eagle Asset Management. A gauge of US Treasuries posted a sixth-straight month of declines in October, according to data compiled by Bloomberg, capping a period of brutal Treasury-bond declines.
To Thomas Simons, a US economist at Jefferies LLC, the drop in yields this week goes to show that traders are more comfortable that the Fed has room to keep rates on hold again in December – even if there’s a limit to the moves until traders begin pricing in more rate cuts.
“All these things contribute to a little bit more comfort that we’re not going to get a rate hike and certainly today that was nailed home,” he said. “We went from, basically last Friday around this time, maximum uncertainty and concern to just having gradually moved down that track each day, more or less.”
With assistance from Ye Xie.
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