US Treasury bond yields have risen markedly, while market participants are preparing for the publication of a key employment report, which may affect expectations of a Fed interest rate cut.
The yield on 5-year Treasury bonds increased by 5.1 basis points, reaching 4.024%, while the yield on 30-year bonds was 4.184% (+4.9 basis points). Meanwhile, the yield on 2-year Treasury bonds, reflecting expectations of short-term interest rates, rose by 4.5 basis points to 4.427%, while the yield on 10-year bonds increased to 4.04% (+4.9 basis points). The curve between the 10-year Treasury yield and the 2-year yield remains inverted, sending a warning that the economy may be falling or has already fallen into recession. Now the gap between 10 and 2 year U.S. debt is 39 basis points.
Data released Thursday showed hiring by US companies ramping up in December, while first-time jobless claims fell in the latest week, the latest signs of a resilient labor market. Today, the market participants will be focused on the nonfarm payrolls report for December, which will be released at 13:30 GMT. Investors hope the data will point to a strong labor market, but don't raise expectations of further interest rate hikes. According to forecasts, in December the nonfarm payroll increased by 168 thousand. This will represent a slight slowdown compared to November (+199 thousand), but will be in line with the trend decline, albeit a bumpy one, in payrolls that has been in place since mid-2022. Meanwhile, the unemployment rate is projected to rise to 3.8% from 3.7%. Interest rates are currently expected to start falling as early as March, but the Fed has not provided a time frame, and there are concerns that rate cuts may come later than expected. According to the CME FedWatch Tool, markets see a 62.7% probability of a 25 basis point rate cut at the Fed meeting in March 2024 (down from 73.4% a week earlier) and a 92.2% probability of a rate cut in May 2024 (compared to 100% a week earlier), with less than 140 basis points of cuts priced in for this year.