(Nov 7): Treasuries rallied after private measures of US economic data pointed to a stumbling jobs market, spurring traders to boost wagers that the Federal Reserve will cut interest rates next month.
Yields on US 10-year debt fell eight basis points to 4.08%, while two-year notes — among the most sensitive to changes in monetary policy — dropped to 3.56%. Swaps tied to policy-meeting dates now imply a better than 60% chance of a quarter-point reduction next month, up from around 50% on Wednesday.
The gains came after numbers from Challenger, Gray & Christmas Inc showed that US companies announced the most job cuts in any October in more than two decades. The rally deepened after Revelio Labs data showed a loss of 9,100 nonfarm jobs in October after 33,000 of gains the month prior.
Traders are focused on independent data as the record US government shutdown interferes with the normal release of Labor Department statistics.
“This adds to the Fed’s cautious/dovish rhetoric on the labour market,” said Evelyne Gomez-Liechti, a strategist at Mizuho International plc.
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After delivering two straight reductions to bring the policy rate to a range of 3.75% to 4%, policymakers are now left to weigh signs of a sagging labour market against inflation that remains stubbornly above their target.
Fed chair Jerome Powell last week prompted investors to pull back on rate-cut expectations when he said that a reduction at the last meeting of the year “is not a foregone conclusion.”
“This trio of signs that the labour market is weakening points to some sustained gains in Treasuries. ... With the US government shutdown now the longest in history, and official economic indicators delayed as a result, private information is gaining in importance. And with the Fed focused on weakness in the labour market, the bond markets are uber sensitive to the data,” says Alyce Andres, Macro Strategist at Bloomberg’s Strategists.
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Thursday’s figures followed a report a day earlier from ADP Research Institute that showed private-sector payrolls increased in October, sparking a selloff in the Treasuries market.
The mixed signals from this week’s data highlight “the data problem in a nutshell” for bond traders, said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investment.
“We have a range of private sector employment proxies throwing up yellow and red flags, but not much to tell us whether the decline in job creation is going to raise the unemployment rate,” Al-Hussainy said.
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