(Bloomberg) -- Treasuries retreated from near their best levels of the past month as the first of three labor-market reports this week backed wagers that the Federal Reserve's next move will be to raise interest rates.
Yields rebounded, trimming declines of two to three basis points across maturities, after the US Bureau of Labor Statistics' Job Openings and Labor Turnover Survey for April found that openings exceeded all economist estimates in a Bloomberg poll.
The sign of resilience in the US labor market chipped away at the view that Fed rate cuts remain possible this year even as inflation outpaces the central bank's 2% objective by a widening margin.
"While the details were mixed, the data points to stabilization in labor demand — providing the Fed with further flexibility to adopt a neutral stance on policy rates," said Vail Hartman, a US rates strategist at BMO Capital Markets.
Cleveland Fed President Beth Hammack, among the regional bank leaders that vote on policy this year and one of the central bank's most hawkish officials, in a speech before the JOLTS data said more restrictive rates might be needed to combat inflation risk.
Hammack was among the three Fed policymakers who voted against the Fed's April policy statement because it signaled that that the next move still could be a rate cut.
Oil Prices
At the same time, yields continued to be led day-to-day by oil prices, which retraced a portion of Monday's surge induced by reports of a communications breakdown between the US and Iran. US and global benchmark oil futures prices remained inside Monday's ranges as they settled higher by 1.7% and 1.1% respectively.
In recent weeks, a drop in benchmark oil prices from the highest levels since the supply shock unleashed by the US attack on Iran in late February helped trim Treasury yields across maturities by 10 to 20 basis points from their May peaks.
What Bloomberg's Strategists Say ...
"The rolling 30-day correlation between WTI crude and US two-year Treasury yields has climbed to its highest level in years, underscoring how tightly the rates market has become tethered to moves in energy prices."
— Brendan Fagan, macro strategists
Steeper gains for most European bond markets and Japan's also were a factor for Treasuries Tuesday. The UK and most euro-zone 10-year yields declined at least three basis points, while Japan's tumbled more than 10 basis points after strong demand for an auction of the securities.
The war-driven oil price surge has dominated the bond market by driving up actual and expected inflation rates and wiping out expectations that the Fed, newly led by Chairman Kevin Warsh, would cut interest rates as soon as next month, the first meeting he will preside over.
Instead, market-implied expectations have shifted to price in rate increases by the Fed. A quarter-point hike is fully priced into swap contracts for March 2027, and about 18 basis points of tightening for December, equivalent to about 70% of a quarter-point hike.
The JOLTS data found the most US job openings in almost two years and fewer layoffs, even as businesses navigated rising energy costs. Available positions rose to 7.62 million from 6.89 million in March. The median estimate was for 6.87 million openings.
Signs of labor-market stabilization are "allowing Fed policymakers to remain squarely focused on troubling inflation and pushing the market to price in both higher real yields and breakevens," said Zach Griffiths, head of investment grade and macro strategy at CreditSights.
Termed real yields, the yields on inflation-protected debt afford a clearer view of the outlook for monetary policy as market participants are indifferent to future inflation. Breakevens, the difference between real and higher conventional Treasury yields, represent the average inflation rate needed to equalize their returns.
Breakeven inflation rates for five- and 10-year tenors reached the highest levels since 2023 in the past month as the oil price surge found its way into broad inflation gauges via its impact on gasoline prices.
Signs of weakening employment could restore wagers on rate cuts this year, however. While most Wall Street economists have abandoned forecasts for Fed easing this year,
Read: Bond Trader Bets on Fed Hike Poised for Gut Check From Jobs Data
The JOLTS data for April will be followed by May reports later this week, most notably ADP Research's private-sector hiring data Wednesday and the US government's employment report Friday. Additional job-market indicators expected this week include May Challenger job cuts and weekly jobless claims data, both on Thursday.
Treasuries have been recovering from a selloff that was sparked by bets that the Fed will need to keep rates higher for longer after the Iran war spurred the biggest inflation surge since 2023. But the selloff also raised questions about what other forces might be pushing up long-term borrowing costs.
Factors cited by analysts include the US government's mounting debt burden and the financing demands of the artificial-intelligence boom. Tech companies have already sold more than $300 billion of bonds, prompting debate over how much additional borrowing markets can absorb and whether the issuance surge could spill into sovereign debt markets.
However, Pacific Investment Management Co. said the idea that tech issuance had driven the recent rise in long-dated Treasury yields was overstated, even if the boom in artificial intelligence-related borrowing becomes a bigger influence on bond markets over time.
--With assistance from Ruth Carson, Carter Johnson and Ye Xie.
(Adds context on real yields and breakevens and updates yield levels.)
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