(Bloomberg) -- Treasuries held losses as data on the US labor market alleviated some anxiety about the economy, pushing traders to pull back further on their expectations for aggressive interest-rate cuts this year.
The selloff sent Treasury yields higher across all tenors. A rise in long-term yields gained momentum after demand for the sale of $25 billion in 30-year bonds proved paltry, which followed poor interest on Wednesday for an auction of 10-year notes. Rates on two-year notes, which are sensitive to the Federal Reserve’s policy, were up about 8 basis points to 4.04%.
Swaps traders are now pricing in about 103 basis points worth of easing in 2024, with the first reduction still seen in September, after data showed initial applications for US jobless claims fell last week. But expectations for a 50 basis point cut next month have faded.
“The drop in initial filings was larger-than-anticipated, and the resulting price action suggests the update is being interpreted as evidence that the labor market remains on solid footing,” despite Friday’s weak jobs report, said Ian Lyngen, head of US rates strategy at BMO Capital Markets.
Yields across the maturity curve were up by at least four basis points, reversing declines seen earlier in the session, after data on jobless claims helped alleviate some concerns that the labor market is cooling too fast following last week’s disappointing jobs report. The benchmark 10-year yield rose as much as 8 basis points to 4.02%. Thirty-year bond yields rose to their day’s high following Treasury’s sale of a fresh batch of the securities, reaching as high as 4.31%.
The 30-year bond were sold at a rate of 4.314%, which compared to a 4.283% when-issued level at the 1 p.m. bidding deadline. That so-called auction tail was a sign of poor demand for the debt.
“Another lousy auction,” said Andrew Brenner, head of international fixed income at NatAlliance Securities LLC. “But not as bad as the 10 year” auction.
On Wednesday, a $42 billion auction of new 10-year bonds saw weaker demand than expected, and drew a yield that was well above the pre-sale indicative level. A $58 billion auction of three-year notes earlier in the week attracted decent demand.
There’s been wild swings this week in yields as investors worried over the outlook for the US economy. But a powerful rally later lost steam, with traders looking for more clues on the state of the world’s largest economy and how the central bank will react.
While traders in the swaps market have pulled back on their expectations for super-sized rate cuts in the US this year, they are still pricing in about 38 basis points worth of easing for September. Still, they see about 103 basis points of reductions in total for 2024, compared to around 65 basis points just over a week ago.
“Our baseline case is that the Fed will cut 25 basis points in September,” said Antulio Bomfim, head of global macro for Northern Trust Asset Management. “The market got a little carried away after Friday’s employment report. We see the bar for the Fed doing more than 25 basis points in September as high” since we see the recent data signal just a normalizing of the labor market, he added.
Fed’s Barkin
Federal Reserve Bank of Richmond President Thomas Barkin said in a virtual discussion at an NABE event Thursday that the US central bank has time to assess whether the economy is normalizing before taking action. He didn’t see a need for the Fed to cut rates at their July meeting given they had “some room to see more on the labor side” and on “the inflation side.”
After the US jobs report last week, he said the economy is in good shape, but that it’s unclear whether the labor market is getting back to normal rates of hiring or more seriously deteriorating.
Still, angst in the market is growing. JPMorgan Chase & Co. now sees a 35% chance that the US economy will tip into recession by the end of this year, up from 25% at the start of last month.
--With assistance from Naomi Tajitsu and Aline Oyamada.
(Updates with more details on swap traders’ pricing and additional comments from Northern Trust Asset Management strategist in 11th paragraph and Fed’s Barkin in 12th paragraph.)
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