Treasuries Slide as Resilient Job-Market Data Weighs on Fed Bets

(Bloomberg) — US Treasuries are sliding after US companies added more jobs than expected last month, sending a mixed signal to traders who are watching the labor market for signs the Federal Reserve needs to aggressively cut interest rates.

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Bonds were already lower ahead of the ADP private payroll data, reversing the rally Tuesday when Iran’s missile attack on Israel fueled haven demand. Longer-term bonds led the decline, with 10-year yields jumping 5 basis points to 3.78%. The US Treasury selloff followed a broad decline in European bonds with yields for UK 10-year gilts rising 8 basis points as crude oil jumped about 2%.

The ADP data followed a stronger-than-expected job opening report Tuesday that signals the labor market remains resilient. Earlier this week, Fed Chair Jerome Powell said that policymakers are not “in a hurry” to lower rates, discouraging those expecting the central bank to cut the borrowing costs by half percentage point for a second straight meeting.

“The ADP jobs numbers continue to show strength in labor markets,” said Michael Contopoulos, director of fixed income at Richard Bernstein Advisors. “The idea that labor is falling off a cliff is mistaken and the market is realizing that.”

Bearish sentiment was present during the US morning trading session in the Treasury options market with a large buyer of protection targeting a 5-year yield increase to approximately 3.75% by the end of next week, from the current level about 3.56%.

Traders are pricing in about 33 basis points worth of easing when the Fed announces its next rate policy on Nov. 7, implying a 33% chance for a half-point cut. They see some 69 basis points of reductions before the end of the year, from the current level at 3.56%.

Treasuries rallied in the five months through September, posting their longest winning streak in 14 years as the Fed finally kicked off its rate-lowering cycle. But the 10-year yields have rebounded 8 basis points since the Sept. 18 Fed meeting. The question remains the pace and size of cuts ahead as policymakers attempt to keep inflation at bay without creating trouble in the labor market.

Traders are betting that the Fed will bring down interest rates from about 5% to a level closer to neutral, which is estimated at about 2.9%, over the next 12 months. Such aggressive easing is rarely seen outside recessions.

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The risk for bond traders is that a resilient economy limits the amount of easing. The Atlanta Fed’s GDPNow model, for instance, suggests the economy is expanding at a solid 2.5% annual pace.

What Bloomberg Strategists Say…

“Powell’s address Monday clearly poured some cold water on the aggressive market pricing for further Fed cuts for the rest of the year. He indicated that last week’s revisions to US post-pandemic growth have been a notable change since the Fed last met in September, adding that the committee is not in a hurry to lower rates.”

— Tatiana Darie, strategist. See more on MLIV.

“Financial markets are wide open, equities are at all time highs, financing is available, real estate prices are going up in every market, and yet we’re stimulating,” Apollo Global Management Inc. Chief Executive Officer Marc Rowan said during an interview on Bloomberg TV. “It is not clear that we need more rate cuts at this point in time.”

ADP Research Institute’s report, which hasn’t been as a reliable indicator of the labor market as US Department of Labor data, showed private payrolls increased 143,000 last month, more than the median estimate of 125,000 among economists surveyed by Bloomberg. Economists expect government data due to be released Friday to show a rebound in job growth and a steady unemployment rate in September.

Subadra Rajappa, head of US rates strategy at Societe Generale, said investors are likely to “lay low” until the presidential election, two days before Fed officials meet.

“I expect yields to remain somewhat range-bound over the upcoming month,” she said.

–With assistance from Edward Bolingbroke.

(Updates bond prices in second and fifth paragraphs.)

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