(Bloomberg) -- Bond investors will turn to a monthly US payrolls report and a speech by Federal Reserve Chair Jerome Powell on Friday for clues on whether a Treasuries rally has room to run as concern over the US economy grows.
Ten-year yields briefly dipped below 4% on Thursday to the lowest since before election day, as President Donald Trump's tariff announcement sent global financial markets into a tailspin. That bid for havens also saw traders boosting bets on Fed interest-rate cuts, fully pricing in a quarter-point move by June.
Fed officials, meanwhile, have said that a resilient labor market and sticky inflation mean they can afford to stand pat, even as Trump's tariffs sapped consumer and business confidence. But a weaker-than-expected payroll figure would challenge that view, heightening the Fed's dilemma over the unusual dual threats of higher inflation and deteriorating growth, and potentially tipping the central bank's hand to backstop the economy.
"The Fed is in a tough spot," said Gang Hu, managing partner at Winshore Capital Partners. "But if Friday's payroll number is bad，the Fed man has to step in and provide support."
Economists surveyed by Bloomberg estimate job growth probably slowed to 140,000 last month, from 151,000 in February, while the unemployment rate held steady at 4.1%. The report is scheduled to be released at 8:30 a.m. New York time.
About three hours after those headlines surface, focus will shift to Powell, who will speak on the economic outlook at a public event. Wall Street will be looking for clues on his response to the latest jobs data as well as careening markets in the wake of the aggressive tariff roll-out.
"We do not see any signs of buyer exhaustion in the Treasury market or seller exhaustion in US equities at this point," wrote
Treasury yields were little changed in early Asia trading Friday, with the 10-year at around 4.03%.
Economists generally expect the tariffs will lift inflation and slow growth, keeping the Fed in wait-and-see mode. But the debate over the path of interest rates has ramped up after the tariff announcement. While Morgan Stanley now expects no cuts this year, down from one previously, citing inflation risks, UBS Global Wealth Management see more cuts this year.
Vineer Bhansali, chief investment officer and founder of Longtail Alpha, said he's buying two-year notes and selling 30-year bonds, a trade known as curve steepener. It's a bet that a slowing economy will force the Fed to lower interest rates, while elevated inflation would lead long-term bonds to underperform.
That growing wager is reflected in the market, with the yield difference between two-year and 30-year bonds widening to 75 basis points Thursday, a three-year high.
"The distribution of possible outcomes has gotten flatter," Bhansali said. "Anything can happen."
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