Bond traders are resolute in their belief that the Federal Reserve will implement significant interest rate cuts in 2024, despite a day of yield fluctuations fueled by a mix of employment and service-industry data on Friday. Swap contracts tied to Fed meeting dates are indicating nearly six quarter-point cuts, with over a 70% probability of a quarter-point policy-rate decrease in March.
The market initially adjusted its expectations following a job creation report that exceeded estimates and came with increased wages. However, a closer examination of the payrolls report, significant revisions to November payrolls, and a soft reading on the US service sector bolstered the confidence of traders, leading to a rebound in Treasury yields.
Yields moved in tandem, rising sharply immediately after the employment data before declining as investors utilized the rise to acquire Treasuries.
The rebound in Treasury yields at the beginning of the year follows a sharp rally in bonds during the last two months of 2023, signaling a shift in the Fed’s stance towards more dovish monetary policy. Despite a 0.75% decline in bonds so far this year through Thursday’s close and higher yields for the week, many market participants view the rate uptick as an opportunity to recalibrate their positions.
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock Inc., suggested that the market had gotten ahead of the Fed and expressed optimism about the rise in rates. He anticipates the Fed to potentially cut rates in May or June and would become more enthusiastic about Treasuries if rates rise another 15 to 20 basis points.
Two-year Treasury yields initially climbed nearly 10 basis points in early US trading to around 4.48%, the highest since mid-December, before sliding to about 4.33%. Despite the gyrations, yields of all maturities were down by mid-morning, with the global benchmark 10-year rate at about 3.97%, well below its Friday high around 4.10%.
The fluctuating market conditions followed a nonfarm payrolls report showing a 216,000 increase in employment, downward revisions to the prior two months, and a steady unemployment rate. Meanwhile, the Institute for Supply Management’s services gauge decreased significantly in December, adding to market uncertainty.
Traders are now bracing for increased volatility as they adjust their outlook around key economic data. Long positions on Treasuries have been trimmed, some new shorts added, and trend-following firms like AlphaSimplex Group, which had previously benefited from rising yields, now signal bullish sentiments on bonds.
Despite the ongoing market adjustments, the March meeting remains a focal point, with traders preparing for potential shifts in the economic landscape. The Federal Reserve’s next two-day meeting is scheduled to begin on January 30.
