Treasury yields dip ahead of jobs data that should impact Fed thinking

Bond yields fell on Friday, though trading was cautious ahead of crucial U.S. jobs data that may impact Federal Reserve thinking on the path for interest rates.

What’s happening
  • The yield on the 2-year Treasury
    slipped by less than 1 basis point to 3.012%. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury
    retreated 1.8 basis points to 2.984%.

  • The yield on the 30-year Treasury
    fell 1.7 basis points to 3.172%.

  • The 10-year to 2-year spread of minus 2.8 basis points means the yield curve remains inverted, potentially signaling a looming economic downturn.

What’s driving markets

Bond investors were poised to parse the U.S. June nonfarm payrolls data, due for release at 8.30am Eastern. Forecasts suggest 250,000 jobs were added last month, down from 390,000 in May. Wage growth is expected to rise by 5% year-on-year.

A stronger-than-expected report would likely force Treasury yields higher, and further invert the yield curve, as traders increase bets that the Federal Reserve will raise borrowing costs more aggressively in its campaign to suppress inflation.

Futures markets suggest the Fed will increase borrowing costs to 3.5% in 2023. But just three weeks ago expectations were for rates of 3.9%. A weak report may pull such forecasts lower still.

“The bond market seems less concerned with inflation as investors focus on the recession. Obviously, the question now facing the debt market is how steep of a domestic or global recession it will be,” said Peter Cardillo, chief market economist at Spartan Capital Securities.

“We therefore reiterate, yields have seen their highs and are likely to trade off the perspectives of a hard landing ahead,” he added.

Official data published on Thursday showed the number of Americans applying for unemployment benefits was 235,000, the fifth consecutive week above 230,000. It was the highest level in almost six months, and took the four-week moving average to 2.2% above its lows over the last year, noted analysts at Deutsche Bank.

“Remember that in the 60 years of this data, every time we’ve had an +11.5% rise in the 4 week moving average from the lows over the previous year we’ve generally had a recession start relatively quickly (average 2 months),” Deutsche added.

Meanwhile, the market flip flopping between inflation concerns and growth fears has left investors in a nervous state. The MOVE index, a gauge of expected Treasury market volatility, is trading near 150, just shy of a multi-year high and up 143% from a year ago.

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