US yields shrink after weak jobs data; markets price in aggressive cuts in 2024
Moves sentence on yield falling 44 bps in 17th paragraph to 16th paragraph. That yield refers to the 7-year yield.
U.S. 10-year yield falls to lowest since November
U.S. two-year yield drops below 4% for 1st time since May 2023
U.S. 2/10 yield curve is least inverted since July 2022
U.S. rate futures price in 120 bps cut this year
By Gertrude Chavez-Dreyfuss
NEW YORK, Aug 2 (Reuters) -U.S. Treasury yields took a nosediveon Friday, after data showed the world's largest economy created fewer jobs than expected in July while the unemployment rate rose, supporting bets of aggressive interest rate cuts by theFederal Reserve this year.
The U.S. 10-year yield dropped as low as 3.79%, the lowest since December, and was last down 17.6 basis points (bps) at 3.801% US10YT=RR. It was on track for its largest daily drop since November2023. On the week, it sank nearly 40 bps, the largest weekly fall since March 2020.
U.S. two-year yields, which track interest rate expectations, fell below 4% for the first time since May 2023. They were last at 3.888%, down 27.7 bps US2YT=RR, on pace for the biggest daily fall since March last year.
On the week, two-year yields stumbled 50.1 bps, the largest weekly decline since March 2023 as well.
Friday's data showed that nonfarm payrolls increased by 114,000 jobs last month after rising by a downwardly revised 179,000 in June. Economists polled by Reuters had forecast payrolls advancing by 175,000 jobs after gaining 206,000 in the previous month.
The unemployment rate ticked up to 4.3%.
The U.S. rate futures market is now pricing in a 73% chance of a 50 basis point cut at the September meeting, up from 20% late on Thursday, according to LSEG calculations. The market has also priced in about 120 bps of easing this year, from 75 bps on Thursday.
"It's messy at the moment. And it's not just equity markets...but this period will sort itself out," said Gregory Faranello, head of U.S. rates, at AmeriVet Securities in New York.
"For yields, it's often about the why. And if yields are forced to come down more aggressively because of economic conditions, that's not a great scenario for risk assets. For now that's how markets are behaving. Ultimately, we don't want the Fed to have to come down more than they'd like."
The closely watched U.S. two-year/10-year yield curve narrowed its inversion, or steepened, to minus 5.7 bps US2US10=TWEB, the least inverted since July 2022. It was last at minus 8.8 bps.
The curve has bull-steepened following the jobs report, which means that short-dated rates fell more sharply than longer-dated ones. Yield curves historically steepen ahead of a Fed easing cycle, as investors price in the fact that rates on the short end of the curve have peaked. The expectation is that the Fed'snext move would be a rate cut.
A steeper curve shows longer-dated yields are higher thanthose on shorter maturities, reflecting a normal upward slope. This means investors are being compensated more for the risk of holding longer-term securities.
"A month ago, the expectation was less than two rate cuts by the end of the year and now the expectation is, statistically, more than four...So I think that quick adjustment has given people reason to think well maybe the Fed has waited too long and that we're going to slow down more than we had thought," said Josh Wein, portfolio manager, at Hennessy Funds, in Chapel Hill, North Carolina.
"I don't agree with that, but I think that's the consensus, and that's what's driving things lower. The offset to all of that is a 10-year that is lower by (more than) 30 basis points in the last week. I would rather follow that than all of the noise. I think the (stock) market is in great shape."
In other maturities, U.S. three-year and five-year yields slid to their lowest since May last year. The three-yield was last down 26.9 bps at 3.703% US3YT=RR, while the five-year yield fell 22.6 bps to 3.620% US5YT=RR.
The U.S. seven-year yield declined to its lowest since June last year and was last down 21 bpsat 3.676%US7YT=RR. On the week, the yield has fallen 44.5 bps, the biggest weekly loss since April 2000.
On the longer end of the curve, U.S. 20-year bond yields tumbled to a six-month low. They last traded down 12.8 bps at 4.215% US20YT=RR.
U.S. 30-year yields also stumbled to a six-month trough. They last fell 13.9 bps to 4.13% US30YT=RR.
U.S. unemployment jpg https://reut.rs/2X245ch
Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Caroline Valetkevitch; Editing by Emelia Sithole-Matarise and Andrea Ricci and Chizu Nomiyama
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