(Bloomberg) -- Treasuries slumped, led by shorter maturities, after stronger-than-expected US employment data prompted traders to pare expectations for Federal Reserve interest-rate cuts this year.
The move pushed yields broadly higher on Wednesday, with the two-year — which is most sensitive to the central bank's policy changes — higher by about 5 basis points to 3.5%. Benchmark 10-year yields were up around 2 basis points to 4.16%.
Traders had been bracing for weak figures after a series of soft employment figures in recent days. Also, some Trump administration officials suggested earlier this week that leaner jobs numbers may be ahead. So the strong data caught the market off guard. Traders are now pricing in the Fed's next rate reduction in July, from June previously. Those meetings would come after the term of current Chair Jerome Powell ends in May.
"The market came into this expecting a weak number and got the opposite," said John Briggs, head of US rates strategy at Natixis. "As for market pricing of cuts, it's falling as one would expect given the Fed's focus on the labor market."
Interest-rate swaps after the data showed traders see less than a 5% chance that policymakers lower rates when they meet in March. Traders have priced in a total of 54 basis points of policy easing by December, compared with 59 basis points on Tuesday.
Non-farm payrolls increased 130,000 last month, about double the median estimate of economists surveyed by Bloomberg. The unemployment rate fell to 4.3%, from 4.4%, the government report showed.
'No Rush'
The data "suggests that the Fed remains in no rush to cut interest rates in the near-term," said Gennadiy Goldberg, head of US interest-rates strategy at TD Securities. Still, "markets will struggle to price out all cuts this year as we believe the stronger reading signals a delay of cuts, rather than the Fed unlikely to cut this year."
Goldberg expects this to keep pressure on 10-year Treasury yields in a range of 4.10% to 4.30%. The move put the two-year yields back in the middle of the range – between about 3.4% and 3.6% — that they've been largely stuck in since September.
The selloff increased the expected yield for an auction of 10-year Treasury notes at 1 p.m. New York time. In pre-auction trading the yield on the note to be offered increased to about 4.2% from about 4.14% before the jobs data.
"There's no question the market is trying to price in some concession going into the auction," said Kevin Flanagan, head of investment strategy at WisdomTree.
Bloomberg's dollar gauge rallied to the day's high following the release, then erased gains.
Treasuries had rallied on Monday after National Economic Council Director Kevin Hassett said lower US jobs numbers can be expected in the months ahead. The gains accelerated Tuesday, after a weak retail sales report showed a loss of consumer spending momentum at the end of the holiday-shopping season, reflecting anxiety about the cost of living and slowing job growth.
Warsh Focus
The stronger-than-anticipated January labor-market data, however, is inviting speculation into how Kevin Warsh, President Donald Trump's nominee as the next Fed chair, will handle policy.
Warsh, who must still be confirmed to officially succeed Powell, "might have a harder time convincing the hawks to vote for cuts, if that is in fact his bias," said Subadra Rajappa, a strategist at Societe Generale. "The strong headline and uptick in wages argues for a more cautious approach to policy."
The report, which was delayed due to a brief government shutdown, lent support to Fed officials who want to hold rates steady for now after the central bank cut borrowing costs three times last year to shore up the labor market. The decision to cut in December faced resistance from some policymakers who would like to see inflation cool further before taking actions.
Speaking Tuesday, Cleveland Fed President Beth Hammack, who was critical of the December cut and votes on policy decisions this year, said interest rates could be on an extended hold while officials evaluate incoming economic data. Dallas Fed President Lorie Logan said she's hopeful inflation will continue to come down, though noted it would take "material" weakness in the labor market for her to support more rate cuts.
Economists at CIBC Capital Markets pushed back their forecast for the timing of the next Fed cut following the jobs report. They still see officials easing policy twice this year, in June and July, but previously expected cuts in March and June. Economists at TD Securities pushed back their call for the next cut to June, from March.
--With assistance from Michael MacKenzie, Alice Gledhill, Carter Johnson and Kristine Aquino.
(Updates with Fed forecast changes.)
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