US Treasury yields climbed across the board on Friday after a robust August jobs report, which showed payrolls increased by 210,000, significantly exceeding the estimated 55,000. This stronger-than-expected data pushed up the probability of a Federal Reserve interest rate hike in September to 75.2%, a notable jump from 50.2% just a day prior, according to CME Group’s FedWatch tool. The unemployment rate also unexpectedly declined to 4.0%, further signaling a tight labor market.
Following the jobs report, the yield on the benchmark 10-year Treasury note surged by 8 basis points to 4.83%, recovering from a prior two-day decline. The more policy-sensitive 2-year Treasury yield saw an even larger increase, climbing 12 basis points to 4.45%. This sharp reaction in the bond market indicates that investors are now anticipating a more aggressive stance from the Fed, especially after Governor Christopher Waller's recent comments had temporarily calmed rate hike concerns.
Market strategists, including Jay Hatfield, chief executive of Infrastructure Capital Advisors, noted that while some Fed officials like Waller had suggested patience, the latest economic data, particularly the jobs report and persistent inflation, makes it challenging for the Fed to avoid further rate increases. Hatfield emphasized that the robust jobs growth, combined with headline inflation remaining "awful," supports the Fed's hawkish stance. Prior to this, Waller had indicated he would lean towards holding rates steady if inflation data continued to show disinflationary trends.
The strong jobs figures overshadowed other economic data, including the ISM services PMI, which had earlier indicated an expansion in the services sector. The market's focus has now squarely shifted back to the Federal Reserve's upcoming policy meeting, with expectations for further tightening firmly in place. This move by bond investors suggests a belief that the Fed will prioritize controlling inflation over concerns about potential economic slowdowns.
Meanwhile, some institutional investors are also re-evaluating their exposure to US Treasuries. Norway’s sovereign wealth fund, one of the largest in the world, proposed reducing its government bond holdings from 70% to 50% of its bond portfolio, which would result in a $75 billion decrease in its Treasury holdings. This signals a potential shift away from government bonds towards riskier assets by some major long-term investors, adding another layer of complexity to the Treasury market dynamics.
