U.S. bond yields rise as rally fades ahead of jobs data

US bond yields rose on Wednesday as the recent rally in Treasuries faded ahead of ADP September personal payroll data.

What’s happening

The yield of the 2-year Treasury TMUBMUSD02Y,
Added 2 basis points to 4.121%.
The yield of the 10-year Treasury TMUBMUSD10Y,
gained 5.5 basis points to 3.692%.
The yield of the 30-year government bond TMUBMUSD30Y,
rose 4.5 basis points to 3.745%.

What moves the markets

Treasury yields moved off their two-week lows ahead of the next few days’ release of September employment and inflation data that could set the pace of Federal Reserve rate hikes.

The September ADP jobs survey is due Wednesday at 8:15 am and this frames the September nonfarm payrolls report to be released Friday at 8:30 am. US producer and consumer price data are due on October 12th and 13th.

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The benchmark 10-year government bond yield broke 4% on September 27, amid concerns over continued monetary tightening by the Federal Reserve to combat runaway inflation and as volatility in the UK bond market unsettled investors.

However, bond yields fell sharply in recent sessions after the Bank of England’s asset purchases calmed the gilt market and data out of the US suggested the world’s largest economy was slowing.

Tuesday’s soft JOLTS jobs report was the first clear evidence that labor demand is softening significantly, said Ian Shepherdson, chief economist at Pantheon Macroeconomics, and this could help the Fed ease future rate hikes.

“Two more JOLTS reports will be released ahead of December’s FOMC [rate-setting meeting]and if they look like August, the Fed isn’t going to rise 50 basis points or more at the last meeting of the year,” Shepherdson said.

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Brian Daingerfield, head of G10 FX strategy at NatWest Markets agreed: “A sharp drop in job vacancies reported in August seemed to reinforce the idea that Fed tightening was beginning to reduce demand for labor, and ultimately to a lower one Inflation could lead and an eventual turning point.”

“The ‘top Fed hawks’ narrative has had several false starts – today’s data will tell us [Tuesday] is another such step,” concluded Daingerfield.

Economists are forecasting that Friday’s payroll report will show 275,000 net jobs were added in the US last month, compared to 315,000 in August. The unemployment rate is expected to be unchanged at 3.7% and average hourly wage growth is also unchanged at 0.3%.

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Markets are pricing in a 65% chance that the Fed will hike rates another 75 basis points to a range of 3.75% to 4.00% after its Nov. 2 meeting. According to the CME FedWatch tool, the central bank is expected to raise its Fed interest rate target to 4.5% by April 2023.

Atlanta Fed President Raphael Bostic will address inflation at 4 p.m. Eastern at Northwestern University.

Other US economic updates due for release on Wednesday include international trade balance data for August at 8:30 am; the S&P Services September PMI survey at 9:45 am; and the September ISM service report at 10 a.m

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