The bond market continues to remain a headache for investors, as long-end Treasury yields are threatening to break higher again this week.
The softer US jobs report on Friday last week was exactly the kind of data that should have taken some pressure off rates. Non-farm payrolls rose by just 29k, well below expectations around 90k, while the unemployment rate ticked up to 4.2%. Adding to that, wage growth also cooled.
And initially, the bond market reacted exactly as you might expect it to. 10-year Treasury yields fell sharply towards 5.16% on the release as traders scaled back expectations for another Fed rate hike in October.
However, that relief was rather short-lived.
Yields quickly reversed the entire drop and have since pushed back above 5.30%. I would argue that the speed of that reversal is rather telling.
Weak payrolls may be enough to change up the conversation surrounding the Fed in the near-term, but they weren’t enough to convince investors to hold long-end Treasuries.
If you zoom out, the move looks even more significant.
10-year Treasury yields are now breaking back above 5.30% to push to their highest levels since 2002.
Now, this is not just another volatile reaction to one economic data/report. It is important to recognise that the bond market is sending a message that even a Fed pause does not automatically mean lower yields.
Traders are still convinced that the Fed is not likely to raise interest rates in October, with market pricing assigning only around a 24% chance of a 25 bps move. That’s a key thing to note.
The rise in yields isn’t necessarily the bond market betting on another rate hike in October. Instead, it suggests that investors are becoming more reluctant to assume that a Fed pause will automatically translate into lower borrowing costs further out the curve.
Fiscal concerns and greater uncertainty over where inflation ultimately settles remain part of the big picture problem. Meanwhile, heavy Treasury issuance and a rising term premium are adding another layer to that and forcing investors to demand more compensation for holding longer-dated government debt.
For now, the Fed may be afforded more room to pause on its policy setting. But unless those broader pressures ease, the long-end of the bond market may continue to do the tightening for it.
This article was written by Justin Low at investinglive.com.