Key US Yields Hit 4% for First Time Since August on Fed Rethink

US Treasury Yields Reach 4% as Strong Jobs Data Shifts Federal Reserve Speculations

October 2, 2023

(Bloomberg) — Key US Treasury yields have surged back to 4%, a level last seen in August, driven by a surprisingly strong jobs report that undermined prospects for significant interest rate reductions from the Federal Reserve.

On Monday, bonds experienced a sell-off, extending losses from late last week following the unexpectedly robust payroll data for September. The yield on 10-year Treasuries climbed by as much as four basis points to hit 4.01%, while the two-year yield rose nine basis points to match the same level.

The market’s movements reflect mounting uncertainties regarding the Fed’s future policy actions. Money markets are now pricing out the possibility of another half-point cut for the remainder of the year, with a quarter-point reduction in November deemed more plausible at an 86% probability. Notably, for the first time since August 1st, there are now fewer than 50 basis points of cuts implied through the end of this year.

“We’ve expected higher yields, but anticipated a somewhat gradual adjustment,” wrote George Cole and his team of strategists at Goldman Sachs Group Inc. in a note. “The strength in the September jobs report may have accelerated this process, reigniting debate around the degree of policy restriction and, consequently, the potential depth of Fed cuts.”

Shorter-dated US Treasuries, sensitive to shifts in monetary policy, have underperformed, leading to a renewed yield curve inversion. For the first time since September 18th, two-year yields are trading above 10-year rates. Typically, bond yield curves slope upward, with longer-term notes offering higher yields—a trend disrupted for nearly two years due to aggressive Fed rate hikes.

European bonds followed suit, with the German 10-year yield increasing four basis points to 2.25%, marking its highest level in over a month. Meanwhile, the UK’s 10-year equivalent rose six basis points to 4.19%.

This latest selloff, triggered by Friday’s jobs data, highlights a year marked by repeated recalibrations in investor expectations related to both the economy and Fed policy. Additionally, US services activity last week surprised traders, surpassing forecasts and further complicating narratives about a rapid economic slowdown.

Looking ahead, traders are focused on upcoming speeches from several Fed policymakers, including Minneapolis Fed President Neel Kashkari, Atlanta Fed President Raphael Bostic, St. Louis Fed President Alberto Musalem, and Fed Board member Michele Bowman, who will address different events on Monday.

Moreover, the market is on edge for US inflation data due later this week. The consumer price index is anticipated to show a modest increase of 0.1% in September, marking its smallest gain in three months. Fed Chair Jerome Powell has indicated that projections issued alongside the Fed’s September rate decision suggest a trajectory of quarter-point rate cuts during the final two meetings of the year.

“A recession isn’t necessary for inflation to return to tolerable levels; the Fed may ease before genuine economic weakness emerges,” noted Dario Perkins, managing director at TS Lombard. “At this point, it should be clear that the Fed is adopting a pre-emptive approach to rate cuts.”

(This article has been updated to include curve inversion in the fifth paragraph.)

Expert Discussion

To gain a deeper understanding of the implications of the current Treasury yield environment, we have gathered a panel of experts.

Dr. Ava Johnson, Economist

Dr. Johnson emphasizes that the reliability of job data is critical for assessing economic health. How do you view the volatility in investor expectations regarding Fed actions?

Mr. Brian Chen, Financial Analyst

Mr. Chen discusses market trends, suggesting that the current yields reflect not only economic data but also global market sentiments. Do you foresee any external factors influencing these yields further?

Ms. Laura Thompson, Investment Strategist

Ms. Thompson addresses the psychological aspects of market reactions. Will the anticipated Fed rate cuts stabilize the markets, or do you expect further fluctuations?

Dr. Rick Salman, Monetary Policy Expert

Dr. Salman questions whether the Fed’s pre-emptive stance is justified given current economic data. What are your thoughts on the Fed’s strategy moving forward?

Join the conversation: What are your views on the current state of US Treasury yields and the Fed’s potential actions? Share your thoughts in the comments below!