The US Treasury market experienced significant selloffs following Friday’s strong employment data, which fueled speculation that the Federal Reserve will pause its interest rate cuts for the remainder of the year. Yields on benchmark US 10-year Treasury notes rose to as much as 4.8% on Monday, marking the highest level since late 2023 and completing a more than 1% increase since mid-September. The 30-year Treasury yield also surged, nearing 5%, after surpassing this level for the first time in over a year on Friday.
Inflation and Debt Concerns Drive Bond Market Volatility
The rise in Treasury yields is driven by persistent inflation concerns and a growing government debt burden. Futures traders are now betting that the Federal Reserve will hold off on further rate cuts until late 2025. The continued spike in oil prices, which reached new highs due to US sanctions on Russia’s oil trade, has compounded worries that inflation may rise further.
Kevin Flanagan, head of fixed-income strategy at WisdomTree, stated, “We are seeing 2024 went out with a bang, the labor market continued to be solid and resilient. It’s probably just a matter of days or weeks when the 10-year joins the 5% trifecta.”
Strong Jobs Data Strengthens Economic Outlook
The release of the December non-farm payrolls data, showing an increase of 256,000 jobs, provided additional evidence of the resilience of the US labor market. The report, which was the largest jobs increase since March, exceeded most economists’ expectations. This stronger-than-expected data led traders to adjust their Fed rate cut expectations, with swaps traders now pricing in only one quarter-point rate cut this year, a shift from their previous bets on two rate cuts.
Wall Street Economists Adjust Fed Rate Cut Forecasts
In light of the robust jobs report, several Wall Street economists revised their forecasts for Fed rate cuts. Economists at Barclays downgraded their expectations, now forecasting only one quarter-point cut, down from their previous call for two. Citigroup shifted its expected timing for a rate cut to May, while JPMorgan now anticipates two quarter-point reductions, down from an earlier forecast of three.
Global Market Repercussions
The recalibration of the Federal Reserve’s outlook has had widespread effects on global markets. The US dollar surged to a two-year high, while European bonds came under pressure. Chris Turner, head of foreign-exchange strategy at ING, stated, “The big question for the market now is whether the Fed really needs to cut at all this year.” He noted that the strength of the dollar and firm US yields are putting pressure on the financial system.
Bond Market Jitters and Vulnerability in Risk Assets
The surge in bond yields is raising concerns about broader market stability, with equities and other risk assets now more vulnerable to declines. Mark Cranfield, a strategist at Markets Live in Singapore, pointed out that jitters in the bond market are expected to persist, especially as investors prepare for this week’s US inflation data. The anticipation of potential inflationary pressures adds uncertainty to the market outlook.
Focus on Inflation Data
Traders are now closely watching upcoming inflation data, with producer-price data due on Tuesday and consumer-price figures scheduled for Wednesday. Laura Cooper, global investment strategist at Nuveen, emphasized the importance of inflation data in shaping market expectations. “Inflation is really that key data point this week,” she said. For many investors, the risk is that the market narrative could shift toward rate hikes if inflation remains stubbornly high.
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