(Bloomberg) — The painful reckoning underway in US government bonds entered a new phase this week as strong labor-market data drove long-maturity yields to new multi-year highs, with 30-year yields increasing the most since December.
(Bloomberg) — The painful reckoning underway in US government bonds entered a new phase this week as strong labor-market data drove long-maturity yields to new multi-year highs, with 30-year yields increasing the most since December.
Treasury yields that were already at or near the highest levels since 2007 rose further, deepening a selloff in its third year as Federal Reserve interest-rate increases have failed to bring inflation back to the central bank’s 2% target. The prospect of a 5% yield on 10-year notes became plausible, even though traders consider another rate increase only slightly likelier than not.
Critical employment data for September released Friday were stronger than expected, lifting yields across the maturity spectrum by at least 13 basis points. The 10-year topped 4.89%, the 30-year 5.05%. While those moves weren’t sustained, confidence that it’s safe to buy bonds ebbed.
It’s “bad news for the markets and for the Fed,” Mohamed El-Erian, the chief economic adviser at Allianz SE and a Bloomberg Opinion columnist, said on Bloomberg Television.
“The Fed is not going to welcome this report. Over the long term this may end up being bad news for the economy as well,” he said. “Something is likely to break.”
Until the fever broke Friday, this week’s surge in yields weighed on stock prices, threatening to slow the economy by tightening financial conditions. The 10-year Treasury yield has increased by more than 20 basis points, the 30-year by more than 23 basis points, its biggest increase in a week since December.
US payrolls expanded in September by twice as much as economists predicted, forcing investors to reassess what level of Fed policy rates the economy is able to cope with. Mitigating the strength in job creation, earnings growth fell short of expectations, and the unemployment rate held steady at 3.8%.
Yields on 30-year bonds pared their increase on the day to about 4 basis points from as much as 16 basis points. Ten-year yields were higher by 6 basis points after climbing nearly 17 basis points.
Shorter-maturity yields rose less as futures traders continue to price in little more than a 50% chance the central bank will increase its benchmark rate by a quarter percentage point at the December meeting after a likely pause when they gather next month. And traders continue to price in Fed rate cuts beginning in the second half of next year.
Alan Ruskin, chief international strategist at Deutsche Bank, said the jobs data have increased the risk that yields will continue to push higher. “All one sees here is a very steady strength,” he said.
Long-maturity Treasury yields have led the march higher in recent weeks, after spending much of the year depressed by speculation that an economic slowdown would prompt the Fed to pivot to rate cuts. That inversion has been steadily eroding, with 30-year only around 16 basis points below two-year yields, compared with more than a full percentage point in July.
Anxiety about US government deficits that are compelling Treasury to boost the supply of debt over the coming quarters has helped push yields higher.
Swap contracts referencing the December Fed meeting priced in about 13 basis points of tightening beyond the current effective fed funds rate of 5.33%. That amounts to roughly even odds that the US central bank will raise its policy rate to 5.5%-5.75% at their final meeting for the year.
“As the employment market goes, so too the Fed,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
–With assistance from Carter Johnson.
(Updates yield levels.)
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