(Bloomberg) -- A selloff in the $28 trillion Treasury market deepened after a blowout US employment report reinforced bets among traders and Wall Street economists that the Federal Reserve will hold off on further interest-rate cuts.
US Treasuries plunged on Friday after data showed the labor market grew in December, sending the 30-year bond's yield above 5% for the first time in more than a year. That built upon a recent selloff in global bonds as investors grow anxious over the prospect of lingering inflation and widening fiscal deficits — including in the US as President-elect Donald Trump returns to the White House.
"With the December jobs report, the only mystery is why the market is still forecasting cuts in the funds rate in 2025 and 2026," said Steven Blitz, chief US economist at TS Lombard. "The incoming administration has no mandate to slow activity in the name of getting inflation lower, and the Fed has long signaled the same."
Ten-year yields on Friday rose to the highest since 2023, while those on notes maturing in two to seven years all rose by more than 10 basis points. Those moves exacerbated a selloff in Treasuries and other major bond markets this week as focus shifted to the outlook for inflation.
Trump's tariff and tax-cut vows have been fanning concern about global trade, price pressures and the US's ability to keep rolling over its swelling debt load without investors demanding higher payouts. And the UK 10-year yield recently hit the highest since 2008 in an echo of the rout that ended Liz Truss's brief stint as prime minister in 2022.
On Friday, though, focus shifted back to the resilience of the US economy and the likelihood the Fed will hold off on additional easing — at least in the coming months. Nonfarm payrolls increased 256,000, exceeding all but one forecast in a Bloomberg survey of economists. The unemployment rate fell to 4.1%, while average hourly earnings rose 0.3% from November, a Bureau of Labor Statistics report showed.
Swaps traders are pricing in about 26 basis points of Fed rate cuts this year, compared to about 38 basis points before the jobs data. A quarter-point reduction is fully priced for around September, versus around June before the report. It was briefly pushed out to as far as October.
After the data, economists at Bank of America said the Fed's monetary policy easing campaign is over, and laid out the risk that officials' next move is a rate increase. Citi economists also shifted their expectations for the path of rates, forecasting the next cut in May rather than January previously. Goldman Sachs sees two cuts this year versus three.
"We believe that the unemployment rate is the most important number from the employment report, followed closely by average hourly earnings — as we see the Fed on hold as long as the unemployment rate is between 4% and 4.5%," said Earl Davis, head of fixed income at BMO Global Asset Management. "They will resume easing at 4.5% and start hiking if it drops below 4%."
Friday's report confirms the labor market held up last year despite high borrowing costs, lingering inflation and political uncertainty. A separate report on consumer sentiment, compiled by the University of Michigan, found that long-term inflation expectations jumped to the highest since 2008 this month. The increase was linked to Trump's tariff agenda as he takes office Jan. 21.
The data raises the stakes for inflation gauges to be updated next week. December consumer price index data to be released Jan. 15 are forecast to show a third straight month of acceleration, to a rate of 2.9%.
Inflation-protected Treasuries suffered smaller losses, resulting in higher market-implied expectations for the CPI growth rate over the next five years. The yield differential between five-year inflation-protected and regular Treasuries — which represents the expected average CPI rate — topped 2.5% for the first time since April.
Yields at 5%
The 30-year yield's breach of 5% marks an important milestone for the US government debt market, which has been under pressure alongside global bonds as investors grow uneasy about the prospect of persistent inflation and rising debt loads.
US yields have climbed some 100 basis points since the Fed began cutting interest rates in September, with policymakers in December making clear they were eager to slow down the pace of reductions.
Longer-maturity bonds have been hit hardest, resulting a steeper yield curve. The 20-year bond, a laggard on the US government debt curve since its re-introduction in 2020, topped the 5% level earlier this week for the first time since 2023.
Firms including Amundi SA, T. Rowe Price and ING are warning that 10-year notes could be the next to hit the 5% level. Some options traders are already targeting a move toward that key threshold.
"We are unequivocally in the buy zone," Michael Collins, executive portfolio manager at PGIM Fixed Income, said on Bloomberg Television just before the job figures were reported. "Rates have backed up a lot. The long-term value in the fixed-income markets is in the government bond component."
The 10-year yields last reached 5% in October 2023. A swift decline followed after the Treasury Department slowed the increase in auction sizes of long-term debt and the Fed signaled the most aggressive tightening cycle in decades was coming to an end as inflation cooled.
That rally helped the Treasury market return 4% in 2023, following a record loss of 12% the previous year. The bond market gained 0.6% in 2024, though it's down about 0.4% so far in 2025.
--With assistance from Kristine Aquino.
(Updates rates throughout.)
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