US Bond Yields Fall on Jobs Data Fueling Two Fed Cuts in 2024

Traders are once again predicting that Federal Reserve officials will lower interest rates twice this year, influenced by a mixed report on the US labor market which has led to a decrease in US Treasury yields.

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On Friday, US bond yields declined, with two- to five-year notes dropping by up to 10 basis points to session lows. The two-year yield fell to 4.60%, the lowest since April 1 and significantly below its 2024 peak of 5.04%. Although the June employment report from the US government showed job creation exceeding forecasts, previous months were revised downward, and the unemployment rate increased.

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This report has emboldened derivative traders, who are now fully pricing in two quarter-point rate cuts for this year, seeing about a 76% chance that Fed Chair Jerome Powell and his colleagues will cut rates as early as September.

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“I think the rally does have room to run,” said Jeff Klingelhofer, co-head of investments at Thornburg Investment Management in Santa Fe. The Fed has a “very strong bias” to “embark on a mild easing cycle as labor comes back into better balance” and inflation might unexpectedly decrease, he noted.

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The employment data is among several factors influencing the world’s largest bond market. Investors are also closely monitoring any developments in President Joe Biden’s reelection campaign following his recent debate performance.

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Next week’s new readings on US inflation, including June’s consumer price data set to be released on Thursday, will be closely watched by markets. Additionally, Powell’s semiannual monetary-policy report to the Senate and the House will be scrutinized for hints about the central bank’s future plans.

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Throughout this year, traders have been trying to predict the first rate cut, with at least two 2024 rate reductions intermittently priced in during the first half of the year. As of Wednesday’s close, before the Fourth of July holiday, traders had been pricing in 47 basis points worth of easing for this year.

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On Friday, data from the Bureau of Labor Statistics showed that nonfarm payrolls rose by 206,000 last month, but job growth in the prior two months was revised down by 111,000. The unemployment rate increased to 4.1% as more people entered the labor force, and average hourly earnings growth slowed.

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While the report bolstered bullish expectations in the bond market for the start of the Fed’s monetary easing cycle, it wasn’t enough to confirm the timing of the first rate cut. Policymakers have maintained benchmark rates in a range of 5.25% to 5.50% for a year.

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“What will cement September is really another round of data and more importantly what we see in terms of the inflation next week and obviously next month,” said Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., on Bloomberg Television Friday. “There are some cross currents that make it a little bit tricky.”

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Moves in the short end of the US Treasury yield curve outpaced those in longer maturities, causing a re-steepening of the yield curve. Benchmark 10-year yields dropped by 8 basis points, and rates on debt with thirty years to maturity fell by about 5 basis points.

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The gap between two- and 10-year yields widened to around 33 basis points, with rates on shorter maturities remaining above those on longer maturities, resulting in what’s known as an inverted curve.

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“It’s very clear the market wants to be long into the political risks,” said Ian Pollick, global head of FICC strategy at Canadian Imperial Bank of Commerce. “Ultimately, the curve reaction makes sense.”

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