Bond market expectations for a Federal Reserve interest-rate hike in May increased after the release of a stronger-than-anticipated US jobs report.
(Bloomberg) — Bond market expectations for a Federal Reserve interest-rate hike in May increased after the release of a stronger-than-anticipated US jobs report.
Short-end Treasury yields leaped higher as the amount of extra policy tightening priced by the swaps market in for the next Federal Open Market Committee gathering was boosted to around 18 basis points from the current effective fed funds rate of 4.83%. That suggests a more than two-in-three chance that officials will bolster the benchmark by a quarter point.
The 2-year Treasury yield surged as much as 12 basis points to 3.96% before drifting to 3.92%. The 10-year benchmark climbed as much as 7 basis points to 3.38% and then pared its level to 3.35%. The inversion of the curve between 2 and 10 years deepened.
“Across the board strength” in the US jobs report “will boost the chances of a 25 basis point hike in May. It should push out the timing of cuts as well,” said Priya Misra, global head of rates strategy at TD Securities. “This will allow the Fed to hike in May. But the market will remain focused on other less lagging data and bank earnings.”
The market had been pricing around 14 basis points of May tightening in the lead up to the jobs report, suggesting a little over a one-in-two chance of a hike.
The market reduced the amount of subsequent policy-rate cuts it expects heading into the back end of 2023, with swaps suggesting a Fed benchmark rate of around 4.33% by the end of December. That figure was close to 4.18% ahead of the labor-market data.
The selloff in Treasury markets was helped by a block trade in 10-year futures.
The dollar strengthened against the yen and the euro. US equity-index futures edged up.
Nonfarm payrolls increased 236,000 after an upwardly revised 326,000 advance in February, the Bureau of Labor Statistics said Friday. The unemployment rate fell to 3.5% and monthly wages climbed 0.3%. The median estimate in a Bloomberg survey of economists called for payrolls to rise by 230,000 and for monthly wages to increase by 0.3%.
Treasury yields have moved notably lower in the past month on the back of banking system concerns. Turmoil among financial institutions had fueled a bid for the relative safety of Treasuries and forced a rethink about how tight the Fed can keep policy in the face of increased recession risks, even as inflation remains elevated.
The Friday session for US rates trading is abbreviated because of an early holiday close.
(Updates pricing, adds comment and charts.)
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