The yield on the 10-year U.S. Treasury bond hit the highest level since Nov. 1, 2023 on Friday after the U.S. Department of Labor reported that 256,000 jobs were added in December.
Meanwhile, 30-year bond yields also rose to around 5% after topping that level on Friday for the first time in more than a year. “The big question for the market now is whether the Fed really needs to cut this year,” said Chris Turner, head of currency strategy at ING. “The strong dollar and firm US yields are testing the financial system.”
Analysts at Barclays adjusted their outlook on the Federal Reserve, now forecasting just one rate cut this year, instead of two. Economists at Goldman Sachs, who after the report also adjusted their expectations for two rate cuts this year, say they are more “dovish” than the broader market.
“Our base forecast remains somewhat more dovish than the market quote, mainly because we are more optimistic than many that the underlying inflation trend will continue to decline towards 2%. But it’s hard to have much conviction in the timing of cuts because the economic data we expect—a healthy labor market and lower inflation—would make the cuts reasonable but not critical, and because it’s hard to know how the FOMC will handle the tariff increases that are coming. They wait,” they say.
Trump’s second administration begins next week, with the market uncertain regarding tariff policy, among other expected changes. The next big data will be released Wednesday, when the Labor Department reports the consumer price index for December.
Treasuries started the week lower as traders reduced bets on Federal Reserve interest rate cuts following Friday’s US jobs report. Benchmark 10-year bond yields (^TNX) rose as much as 4 basis points on Monday, hitting 4.80%, the highest level since November 2023.
The key data analyzed by the market this week
“Inflation is really the key data this week,” Laura Cooper, global investment strategist at Nuveen, said on Bloomberg TV. “For the market narrative, the risk is that it shifts to expectations of rate increases.” Traders are now questioning how high US yields can go, with some even considering the possibility of rate hikes by the Federal Reserve.
The focus will be on producer price data on Tuesday and then on consumer price data on Wednesday, to better assess the monetary policy outlook. The change in Federal Reserve expectations is boosting the dollar, with the Bloomberg Dollar Benchmark Index rising to the highest level since November 2022 on Monday. This has helped the pound plummet to its lowest level in more than a year, as UK assets remain the epicenter of the global rally, while the offshore yuan has fallen near a record low.
The Tresuaries sale is driven by jitters about persistent inflationary pressures and rising levels of public debt, which has led money markets to reduce bets on US rate cuts to less than a move this year. . This is sending ripples through global markets, with a dollar index hitting a two-year high and European bonds under pressure.
Source: Ambito
