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Treasurys Plunge As Job Creation Pace Dims Wagers On Fed Cuts

Treasuries extended their selloff this week after December job creation greatly exceeded forecasts, sparking a further paring of expectations that the Federal Reserve will cuts interest rates as soon as March.

Yields on all maturities rose sharply, with two-year yields initially climbing almost 10 basis points to around 4.48%, before paring gains. The benchmark 10-year note’s yield jumped about 7 basis points to 4.07%.

In the immediate aftermath of the data release, swap contracts tied to Fed meeting dates priced in slightly less than a 50% chance of a quarter-point policy-rate decrease in March — down from over 60% at the start of the day Friday. Traders also briefly pared expectations for cuts this year to 125 basis points, or five full cuts, down from around 145 basis points on Wednesday.

The probability of a March cut is now hovering just over 50% and swaps imply a total of about 130 basis points of policy-rate cuts in 2024.

“It is clear the Fed is going to be waiting awhile before it starts cutting rates because the labor market is still quite strong and the wage growth is still quite strong,” University of Chicago professor and former Fed Governor Randall Kroszner said on Bloomberg Television.

Following their last meeting of the year, Fed policy makers published new quarterly forecasts on the outlook for the funds rate — projecting three quarter-point cuts in total for this year. The US Central bank left its target range for the rate unchanged in December at 5.25%-5.5%. The Fed’s will begin its next two-day meeting on Jan. 30.

There was a 216,000 increase in new jobs last month, well above the 175,000 consensus forecast by economists surveyed by Bloomberg. Wages gains were also well above most forecasts.

The rebound in Treasury yields to start this year comes after bonds rallied sharply in the last two months of 2023. That saw US bonds eke out a small annual gain, following deep back-to-back losses in 2021 and 2022 as inflation surged and the Fed tightened monetary policy.

“With a mild winter, so far, and jobs numbers typically bolstered by seasonal hiring, we anticipated a strong and better-than-consensus number and here it is,” said Lindsay Rosner, head of fixed income multi sector investing, at Goldman Sachs Asset Management. “This number does question the confidence of the market around the March cut.”

This article was provided by Bloomberg News.



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