The bond market’s selloff accelerated after a surge in US hiring raised expectations that the Federal Reserve will need to raise interest rates again this year.
The September employment data provided further evidence that the US economy is remaining resilient despite the central bank’s aggressive monetary policy tightening, with employers creating twice as many jobs last month as economists predicted.
The figures sent Treasury yields surging across maturities, pushing those on 30-year bonds up as much as 16 basis points to 5.05%, a 16-year high, before paring the increase. Futures traders also priced in odds of more than 50% that the central bank will increase its benchmark rate by a quarter percentage point at the December meeting after a likely pause when they gather next month.
“As the employment market goes so too the Fed,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “It keeps that additional rate hike for 2023 well in play.”
The drop extends the deep selloff that raced through the bond market this week, which has weighed on stock prices and is threatening to slow the economy by further elevating the cost of loans of all kinds. The 10-year Treasury yield, a key benchmark, has risen more by a quarter percentage point this week to 4.84%, its biggest weekly jump since December.
Alan Ruskin, chief international strategist at Deutsche Bank, said the strong payroll figures have increased the risk that yields will continue to push higher. “All one sees here is a very steady strength,” he said.
The selloff was led by longer-dated bonds, whose yields for much of this year had been holding deeply below short-term rates on speculation that an economic slowdown would prompt an about-face from the Fed. But that inversion has been steadily priced out of the market as longer rates rise, with 30-year yields now only around 10 basis points below those on two-year Treasuries.
That shift has been spurred by a hawkish Fed outlook that’s expected to keep rate policy elevated well into 2024, amid unease over US federal-government spending that is compelling Treasury to boost the supply of debt over the coming quarters.
Swap contracts referencing the December Fed meeting priced 14 basis points of tightening beyond the current effective fed funds rate of 5.33%. That suggests odds of around 55% that the US central bank will raise its policy rate to 5.5%-5.75% at their final meeting for the year.
(Updates yields.)