US Bond Yields Fall as Jobs Data Fuels Bets on Two 2024 Fed Cuts

(Bloomberg) — Traders are once again betting that Federal Reserve officials will lower interest rates twice this year as a mixed report on the US labor market drags US Treasury yields lower.

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US bond yields slid on Friday, with those on two- to five-year notes down as much as 10 basis points to session lows. The two-year yield fell as low as 4.60%, the lowest since April 1 and well below a 2024 peak of 5.04%. While the US government’s June employment report showed job creation was above forecast, prior months were revised lower and the unemployment rate rose.

The report emboldened derivative traders, who are once again fully pricing in two quarter-point rate cuts this year. They see about a 76% chance that Fed Chair Jerome Powell and his colleagues cut rates as soon as September.

“I think the rally does have room to run,” Jeff Klingelhofer, co-head of investments at Thornburg Investment Management in Santa Fe. The Fed has a “very strong bias” to “embark on a mild easing cycle as labor comes back into better balance” and inflation may surprise to the downside, he said.

The employment data adds to a list of factors driving the world’s biggest bond market. Investors are on high alert for any developments on President Joe Biden’s reelection campaign after his recent debate performance.

Next week’s fresh readings on US inflation, including June consumer price data out on Thursday, will also be closely watched in markets. Powell’s semiannual monetary-policy report to the Senate and the House will also be monitored for any clues on the central bank’s path ahead.

Traders have been attempting to time the first rate reduction for much of this year, with at least two 2024 rate reductions priced in intermittently throughout the first half. As of Wednesday’s close, before the Fourth of July holiday, traders had been pricing in 47 basis points worth of easing this year.

On Friday, Bureau of Labor Statistics data showed nonfarm payrolls rose by 206,000 last month and job growth in the prior two months was revised down by 111,000. The unemployment rate rose to 4.1% as more people entered the labor force, and average hourly earnings growth cooled.

While the report was supportive of bullish expectations in the bond market for the dawn of the Fed’s monetary easing cycle, it wasn’t enough to lock in the timing of the first rate cut. Policymakers have kept benchmark rates in a range of 5.25% to 5.50% for a year.

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“What will cement September is really another round of data and more importantly what we see in terms of the inflation next week and obviously next month,” Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., said on Bloomberg Television Friday. “There are some cross currents that make it a little bit tricky.”

Moves in the front end of the US Treasury yield curve outpaced those in longer maturities, triggering a re-steepening of the yield curve. Benchmark 10—year yields were down 8 basis points and rates on debt with thirty years to maturity were off about 5 basis points.

The gap between two- and 10-year yields expanded to around 33 basis points, with the rates on shorter maturities remaining above those on the longer maturity in what’s dubbed an inverted curve.

“It’s very clear the market wants to be long into the political risks,” said Ian Pollick, global head of FICC strategy at Canadian Imperial Bank of Commerce. “Ultimately, the curve reaction makes sense.”

–With assistance from Nazmul Ahasan.

(Updates with market pricing throughout.)

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