US Treasury yields across maturities increased on Friday after better-than-expected jobs data for April eased concerns of an economic slowdown. Treasury yields move inversely to prices. A strong jobs report often results in a decrease in bond prices, as it sends investors looking for riskier assets like stocks, causing an increase in yields. This time, data revealed the US added 253,000 jobs in April, beating estimates and pushing 3-year Treasury yields up 16 basis points to 3.608%, and 2-year yields up 14 basis points to 3.879% in morning trading.
As a result of the strong economic data, Fed funds futures traders reduced the probability of a rate cut to zero; down from 9.2% on Thursday, according to the CME FedWatch Tool. Markets now predict a 97.2% chance of the Fed pausing its rate-setting policy in June, with a 2.8% likelihood of an additional quarter-point hike. A rate cut later in the year still seems plausible, with a probability of 38.1%.
The recent move in Treasury yields can be assumed to indicate optimism about the near-term outlook for the US economy. The strong jobs data countered the weak inflation numbers for April released by the Federal Reserve last week. Core inflation, which excludes volatile food and energy prices, remained unchanged at the lowest level witnessed in over two years.
Despite the positive economic news, some analysts were still cautious on the longer-term outlook. “One good month of data is not enough,” warned David Donabedian, chief investment officer of CIBC Private Wealth Management. Donabedian noted that the Fed has linked any decision on interest rates to labor market conditions and inflation. As such, he believes the federal funds rate will remain unchanged for several months.
However, others believe that the tide may be turning in favor of a less dovish outlook. “The bond market had been pricing in weaker growth,” said Deutsche Bank strategist Brett Ryan, “and there’s more doubt about whether the Fed actually needs to change the policy.” This view was reiterated by Guillermo Felices, head of research and strategy at BNPP Asset Management. “We see more upside in yields from here,” he said.
Long-term Treasury yields have been significantly influenced by the ongoing trade war with China. As uncertainty persisted, investors opted for safer assets, increasing demand for government bonds and pushing down yields. However, with recent developments on this front being viewed positively, the spotlight may be gradually moving from geopolitics to the fundamentals of the US economy. As evidence of this, the 30-year rate jumped 12 basis points to 4.54%, its highest level in three months. This move is consistent with recent remarks by Federal Reserve Chairman Jerome Powell, who highlighted the strength of the workforce, particularly low unemployment and positive wage growth, as key market indicators.
Traders and investors will now be closely watching the next round of negotiations between the United States and China to determine the future direction of Treasury yields. While a trade deal is still uncertain, a resolution would likely reduce demand for safe-haven assets, such as long-term US government bonds, and push up Treasury yields further. Similarly, developments regarding the ongoing Brexit saga and any further changes in the global economic outlook could influence yields across the board.
In conclusion, the latest surge in US Treasury yields is a positive sign for the near-term outlook of the US economy. Despite some lingering doubts and uncertainties, a healthy jobs report and signs of improvement in trade relations have bolstered market optimism. The next week will be crucial for investors, as it will provide further clarity on the trade front as well as additional economic data, both of which will have significant implications for the trajectory of Treasury yields. While the outlook remains uncertain, the initial reaction to the strong jobs data offers a glimmer of hope for those looking for signs of a steady US economy.
