Routing of Bonds Eases as Traders Parse Data on Jobs and Services

Global bonds stabilized on Wednesday as traders analyzed U.S. data and increased their bets that the Federal Reserve would refrain from further interest rate hikes.

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Ten-year Treasury yields remained lower for the day after peaking at 4.88% earlier in the session. Traders are now pricing in less than a one-in-five chance of a rate hike in November, down from one-in-three previously. Meanwhile, stock markets showed some uncertainty, with the S&P 500 poised to continue its recent decline that pushed the index to a four-month low on Tuesday. Notably, large-cap tech companies like Microsoft Corp. and Amazon.com Inc. drove gains in the Nasdaq 100 index.

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In September, U.S. companies added the fewest jobs since the beginning of 2021, indicating a slowdown in labor demand across various industries. According to a survey conducted by the ADP Research Institute in collaboration with the Stanford Digital Economy Lab, private payrolls increased by only 89,000 last month, compared to 180,000 in August. Additionally, the Institute for Supply Management's services index retreated modestly in September, reaching a reading of 53.6, its lowest level this year. However, readings above 50 still indicate expansion.

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"Stock investors have been hoping the labor market will loosen up and give the Fed enough breathing room to dial down its hawkishness," said Mike Loewengart, head of model portfolio construction at the Morgan Stanley Global Investment Office. He noted that while ADP data may not be a reliable predictor of the government's monthly jobs report, a cooling labor market in Friday's report could ease concerns about sustained high interest rates.

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The S&P 500 officially entered oversold territory, as indicated by its relative strength index falling below 30. This has attracted the attention of investors like Francisco Simón, European head of strategy at Santander AM, who sees opportunities in sectors and companies sensitive to interest rates. He anticipates that these assets may rebound once interest rates stabilize, as current yields are already high relative to expected inflation and long-term growth.

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The recent selloff was driven by better-than-expected U.S. job data on Tuesday, along with a series of hawkish remarks from Federal Reserve officials. As the belief solidified that U.S. interest rates could continue to rise from their current 22-year highs, 30-year yields touched 5% for the first time since 2007.

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Virginie Maisonneuve, global chief investment officer for equities at Allianz Global Investors, acknowledged the current volatile environment and suggested that investors with a long-term horizon should seek out stocks with strong structural growth support and solid balance sheets.

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