Market Turmoil Ahead: Treasury Yields Surge on Strong Jobs Report
The US economy is showing no signs of slowing down, and the latest jobs report has sent Treasury yields soaring. Employers added a whopping 256,000 jobs in December, far exceeding economists’ forecasts, and the unemployment rate dropped to its lowest level in months. This has led to a significant shift in market expectations, with investors now bracing for higher interest rates for longer.
Fed Rate Hike Fears Intensify
The strong jobs report has dashed hopes of a rate cut anytime soon. In fact, traders are now expecting the Federal Reserve to wait until at least June to reduce its policy rate. This is a significant change from earlier projections, which had the Fed cutting rates as early as May. Both J.P. Morgan and Goldman Sachs have pushed their Fed rate cut forecast to June, citing concerns over inflation.
Inflation Fears Resurface
The jobs report has also reignited concerns about inflation, which remains stubbornly above the Fed’s 2% target. “The report was obviously negative for inflation,” said Felipe Villarroel, partner and portfolio manager at TwentyFour Asset Management. “This is definitely not an economy that is decelerating.” With inflation still a concern, the Fed’s next move could be a hike, a scenario that would have been unthinkable just a few months ago.
Treasury Yields Hit Highest Levels Since November
Longer-dated US Treasury yields have jumped to their highest levels since November 2023, with the 10-year yield hitting a high of 4.79%. Yields have gained 20 basis points since the beginning of the year, amid a global government bonds selloff that has hit UK government bonds particularly hard.
Bond Market Fears Further Weakness
Many in the bond market fear further weakness lies ahead, as fiscal and trade policies under the upcoming administration could lead to more Treasury issuance and a rebound in inflation. A BMO Capital Markets client survey showed 69% of respondents expect 10-year yields will test 5% at some point this year.
Impact on Stocks and Other Assets
Rising US Treasury yields could dampen investor interest in stocks and other high-risk assets by tightening financial conditions and increasing borrowing costs for businesses and individuals. Higher yields can also improve the attractiveness of bonds against equities, making 5% a trigger point for asset allocation shifts. The S&P 500 was down 1% on Friday, and analysts warn that the 10-year yield will remain above 4% this year, making it challenging for the stock market.
What’s Next?
Next week’s economic reports will feature December’s producer and consumer price inflation data, which could be key for the direction of yields. The yield curve is also worth watching, as a shift to a bear flattening dynamic could indicate that investors anticipate central banks will increase interest rates. With the economy showing no signs of slowing down, investors are bracing for a tumultuous year ahead.
Leave a Reply