(Bloomberg) -- Bond traders pared back their expectations for a Federal Reserve interest-rate hike this month on indications of weakness in the US labor market.
Treasuries rose on Friday after the US added fewer jobs than expected in September and the unemployment rate edged higher, pushing the yield on two-year notes — which are most sensitive to the Fed's policy path — lower by as much as 10 basis points to 4.69%.
Interest-rate swaps showed traders priced in about a 20% chance that the Fed lifts benchmark borrowing costs at its October meeting, compared to a nearly 30% probability prior to the data. They are no longer fully pricing in one rate hike by the end of the year.
"This takes October off the table for the Fed," said James Athey, a money manager at Marlborough Investment Management Ltd. "It is very hard to make a strong cyclical case from here. The 'US economy is strong' narrative is nonsense."
He said he has been bullish on bonds, adding that the job report "does give us added confidence in that view."
The data comes on the heels of a monthslong selloff in the $32 trillion Treasuries market driven by elevated energy prices that fuel inflation, an economy powered by booming AI infrastructure spending and concern about the US fiscal picture. While Treasuries also rose on haven demand Thursday — as European bond markets shook — US yields remain near multiyear highs.
Benchmark 10-year yields, which serve as a baseline to price other loans such as mortgages, this week hit their highest level since 2002.
On Friday, they were down as much as eight basis points to 5.15% after Bureau of Labor Statistics data showed nonfarm payrolls increased 29,000 last month following a downward revision to the prior two months. That missed all estimates in a Bloomberg survey of economists.
"On the margin it gives the Fed more cover to stay on hold and not to hike," said Charles Tan, chief investment officer of global fixed income at American Century Investments. "On the flip side, we're just one or two inflation data points away from coming back to the more hawkish side."
Ahead of the data, traders had been loading up on short wagers in the US Treasuries market as yields surged higher. That positioning stands to exacerbate Friday's rally if traders exit those bets.
Flows after the data reflect some traders selling the November fed funds futures as they pull back on expectations for a rate increase at the late-October policy meeting. The central bank under Chairman Kevin Warsh last month raised rates for the first time since 2023. Inflation remains above the central bank's target even after its preferred gauge showed moderation in August.
Fed officials this week — including Vice Chair Philip Jefferson and New York Fed President John Williams — had already started to temper some expectations by saying that officials could wait and watch the data before making another move. Dallas Fed President Lorie Logan, meanwhile, said more hikes were warranted to reign in inflation, but that elevated Treasury yields may also help slow the economy.
"For the Fed, this number should be the nail in the coffin for an October hike," said Thomas Simons, chief US economist at Jefferies. "We had been expecting that they would continue with successive 25 basis point moves, but it now looks more likely that the policymakers emphasizing that they have some more time before another hike is needed will remain patient."
European Moves
Traders also pared expectations of European and UK interest-rate hikes after the data. Money markets priced a greater likelihood of two ECB rate hikes than three; and three rather than four for the Bank of England, having previously priced over 100 basis points of tightening for both as recently as Tuesday.
Bets had already pared amid lower oil prices and an expected dovish tilt from the ECB, following a steep selloff in European periphery debt, especially in France.
--With assistance from Edward Bolingbroke, George Nixon, Victor Swezey and Elizabeth Stanton.
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