(April 3): US treasuries fell as a solid reading of the labour market prompted traders to reduce bets the Federal Reserve will lower interest rates this year.
The decline in Friday’s shortened trading session pushed yields higher by three to five basis points (bps, led by the policy-sensitive two-year. Traders erased what remained of their bets on Fed easing this year, having priced in only about 4bps before the report, and trimmed wagers on a cut next year.
The Fed is “increasingly likely to be on hold through June, perhaps further,” said David Robin, an interest-rate strategist at TJM Institutional Services LLC. “This is pre-conflict data, but nevertheless shows a higher base line.”
The latest employment report offered a positive picture of the US employment market in March, showing an unexpected drop in the unemployment rate.
But focus in the US$31 trillion treasuries market remains on the conflict in the Middle East. Bond investors have been torn between growth and inflation concerns tied to the war-driven surge in energy prices.
See also: Berkshire sounds out yen bond sale following Tokio Marine deal
Yields have largely been tracking an upswing in oil prices since the US attacked Iran in late February as angst grew around the risk that a potential resurgence of inflation would cause the Fed to delay any rate cuts.
With oil-market trading closed on Friday ahead of the Easter holiday, three tankers broadcasting Omani ownership appeared to have navigated the Strait of Hormuz by hugging their home country’s coastline.
Before the war started on Feb 28, overnight index swaps had priced in more than two quarter-point rate cuts this year. Those expectations were subsequently erased, and traders began to price in the chance that the Fed’s next move would be a rate increase. More recently, the market expects the Fed to stay on hold in 2026.
See also: Berkshire hires banks for yen bond offering in volatile market
The US central bank cut interest rates three times last year in response to weakness in the job market. They paused the cuts in January, citing improvement on that front. Since then, the US Labour Department’s monthly jobs report for January was stronger than anticipated, while February data showed weakness.
The March report — which showed nonfarm payrolls rose by the most since the end of 2024 — is unlikely to change much for US policymakers, Thomas Simons, chief US economist at Jefferies, wrote in a note to clients.
“The data is mostly backward looking, and likely does not incorporate any impact from the recent rise in energy prices, or other risks related to the war in Iran,” he wrote. “For now, there is nothing here that suggests they need to act soon.”
The dollar rose against major peers after the data, then pared its moves as US yields retreated from their session highs.
A pileup of short positions that had recently built into treasuries has been diluted over recent sessions as traders hedge against growth shocks from short-term inflationary pressures. In treasury options, there has been demand for protection against a decline in yields heading into the weekend as traders prepare for a potential gap lower when the cash market reopens on Monday.
Ahead of the employment report, JPMorgan Chase & Co interest-rate strategists advised taking profit on a March 20 recommendation to buy two-year Treasuries at 3.891% in case a strong reading eroded expectations for a Fed rate cut this year.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
Yields on two-year notes were up 5bps to 3.85%, while those on 10-year securities rose to 4.35% in Friday’s shortened trading session, scheduled to end at noon New York time.
“This should diminish fears about the underlying state of the labour market prior to the oil shock,” said Scott Buchta, head of fixed income strategy at Brean Capital LLC. “Prior inflationary fears reset the market higher in terms of yield to a new expectation for the Fed being on hold,” and the data “reaffirms that view”.
Uncertainty remains, however, on the the extent the oil shock will flow through the economy in the coming months, he said. “Everything costs more and incomes are not rising the way they did before.”
Uploaded by Felyx Teoh
