Strong Jobs Report Sends Treasury Yields Soaring Toward 5%

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The recent surge in U.S. Treasury yields could continue to rise, driven by a strong jobs report that increased expectations of sustained high interest rates and raised concerns that 10-year yields could hit 5%.

The December jobs report revealed 256,000 new jobs, far surpassing forecasts, while the unemployment rate dropped, strengthening the market's belief that the Federal Reserve will keep rates high to prevent economic overheating.

This news dashed hopes for a reprieve from the rising Treasury yields that have been causing volatility in stocks this year.

It also reignited worries about inflation, which remains stubbornly above the Fed's 2% target. Felipe Villarroel, a portfolio manager at TwentyFour Asset Management, noted, "This is definitely not an economy that is decelerating."

Traders now expect the Fed to wait until at least June before cutting rates, with some previously predicting a rate cut as early as May.

Both J.P. Morgan and Goldman Sachs have revised their Fed rate cut forecasts to June, up from March.

Concerns about inflation are also fueling speculation that the Fed may raise rates instead of cutting them, a scenario that seemed unlikely just months ago when the market expected rates to decline to 2.8% by the end of this year. Currently, the rates are between 4.25%-4.5%.

Longer-dated Treasury yields have reached their highest levels since November 2023, with the 10-year yield peaking at 4.79%.

Yields have risen 20 basis points since the start of the year amid a global selloff in government bonds, particularly affecting UK bonds, which saw 30-year gilt yields hit their highest levels since 1998.

Many bond market participants are concerned about further weakness, with a potential rise in inflation and increased Treasury issuance under the incoming Trump administration. A survey by BMO Capital Markets revealed that 69% of respondents expect 10-year yields to test 5% this year.

Next week's economic reports, including December's producer and consumer price inflation data, could provide further direction for yields.

The yield curve has steepened in recent weeks, with the 10-year yield rising while shorter-dated yields have remained flat, indicating the market expects high rates to persist due to the economy's resilience.

However, if inflation rises again, this trend could reverse, with short-term rates rising faster than long-term rates, which would signal the possibility of further rate hikes.

Higher Treasury yields could also discourage investment in stocks and other high-risk assets by tightening financial conditions and raising borrowing costs.

As yields rise, bonds become more attractive compared to equities, with 5% yields seen as a key threshold for shifting asset allocations.

Stocks struggled when 10-year yields reached 5% for the first time since 2007 in late 2023, and the market could face further challenges if yields continue to climb.

The S&P 500 dropped 1% on Friday, with Sam Stovall, chief investment strategist at CFRA Research, warning that the stock market could find it tough to navigate yields staying above 4% this year. "We started the year on the wrong foot," Stovall added.

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.