(Bloomberg) — Treasury yields declined Wednesday after a weaker-than-expected report on hiring and firing by US employers in July caused traders to almost fully price in a Federal Reserve interest-rate cut this month.
Contracts for predicting Fed moves priced in about 95% of a quarter-point rate cut this month and ramped up wagers on at least two cuts by year end after the JOLTS report showed that job openings declined more than estimated while layoffs exceeded the median survey response.
The jump in rate-cut expectations arrested a selloff in long-maturity Treasuries that had lifted the 30-year bond’s yield to just shy of 5%, the highest level since July. The two-year note’s yield touched 3.60%, the lowest level since early May.
Expectations for Fed rate cuts rocketed higher in early August after US government-compiled employment data showed a slump in job creation over the previous three months. Jobs data for August are slated to be released Friday, and the JOLTS data was consistent with a weakening labor market.
“The expectation is that the Fed is going to move in September, and the Friday data is important,” Gargi Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock Inc., told Bloomberg TV. For policymakers to opt for something other than a quarter-point rate cut on Sept. 17, August employment data “would have to be a very strong or very weak.”
In July, the majority of Fed policymakers viewed the policy rate setting of 4.25%-4.5% as appropriate based on employment and inflation trends. St. Louis Fed President Alberto Musalem reiterated that view Wednesday before the JOLTS data were released.
Fed Governor Christopher Waller, who dissented from the central bank’s July decision to keep rates steady in favor of cutting them and has been among Trump’s candidates to succeed Jerome Powell as chair of the central bank, reiterated Wednesday on CNBC he favors cutting rates at the next meeting on Sept. 16-17 and further in the coming months.
Related story: Fed’s Waller Says He Favors ‘Multiple Cuts’ in Coming Months
Treasury yields were three to five basis points lower on the day after the JOLTS data after erasing what remained of earlier increases. The market may have benefited from recent positioning shifts. JPMorgan’s weekly Treasury client survey and CME Group’s Treasury futures open-interest data indicated that traders cut long positions and added to shorts over the past week.
The 30-year Treasury bond’s yield earlier Wednesday had risen to nearly 5% for the first time since July, underscoring investor concerns about US fiscal trends and elevated inflation, mirroring similar moves in the UK and Japan, where a deepening selloff pushed borrowing costs to the highest this century.
Bond investors globally are demanding increased compensation for financing government deficits. In the US, the Trump administration’s spending and tax cut plans are projected to worsen the country’s fiscal position unless tariff revenue growth is sustained, an outcome that a federal court ruling jeopardized last week.
At the same time, interest-rate strategists say US President Donald Trump’s efforts to gain control of the Federal Reserve in pursuit of interest-rate cuts is helping push up long-term yields relative to short maturities, which are more closely tied to the rate set by the Fed. Rate cuts might keep upward pressure on inflation rates that still exceed the central bank’s 2% target, strategists say.
“The signal is quite clear that there is still at these levels no appetite for the long end,” Ella Hoxha, head of fixed income at Newton Investment Management, told Bloomberg TV this week. “The risks are there’s going to be less appetite going forward.”
As yields on Treasuries maturing in two to five years reached the lowest levels since early May last week, the move produced some of the widest differentials between short- and long-term yields in years.
The divergence is “an unusual situation reflecting investors’ wish for more compensation to hold long-term bonds,” BlackRock Investment Institute strategists including Wei Li wrote in a note.
–With assistance from James Hirai.
(Adds JOLTS data and updates yield levels.)
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