(Bloomberg) -- Treasury yields are ending the week higher as traders unwind their positioning in anticipation of risks tied to the election, a likely interest-rate cut and a three big debt auctions in the US.
Yields climbed across the curve on Friday, reversing an early decline that came after data showed the economy generated just 12,000 jobs last month amid storms and strikes. Longer-dated yields led the advance in New York afternoon trading, while a key gauge of the dollar headed for its strongest closing level since July.
“This is a time when you’ve got to take a very holistic view,” Mohamed El-Erian, president of Queens’ College, Cambridge and Bloomberg Opinion columnist, said on Bloomberg TV. “We have some major events coming up.”
Traders held tight to expectations that policymakers will cut rates by a quarter-point on Nov. 7 and again on Dec. 18, pricing in 44 basis points by year’s end. They see 57 basis points of cumulative easing by the end of January, implying the potential that Fed officials pause their reductions early next year.
Unlike last month, when several banks changed their Fed forecasts based on stronger-than-expected employment data, the October report drew only affirmations of the widespread forecast for quarter-point rate cuts next week and in December. Citigroup stuck with its call for a half-point move in December.
Friday’s job report showed just 12,000 jobs created in October, with severe hurricanes and a major strike causing the data to come in well below the median economist forecast of 100,000. The prior month’s total was revised lower to 223,000 from 254,000.
“While the Fed will likely attribute some of the weakness in today’s data to one-off factors, the softness in today’s data argues for the Fed to continue its easing cycle at next week’s meeting,” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management. “Sky clearing for a November 25-basis-point cut.”
To Kevin Flanagan, head of fixed income strategy at WisdomTree, a pause in the Fed’s rate-cutting cycle after two more quarter-point reductions in 2024 would likely leave Treasury yields stuck around their current levels.
What Bloomberg strategists say...
“Low conviction is in part due to Tuesday’s US presidential election and Thursday’s Federal Reserve meeting. Had it not been for these two pending events, a big miss on headline payrolls and downward revisions would have elicited a much bigger slide in yields.”
— Alyce Andres, strategist. Read more on MLIV.
An early and brief rally in Treasuries was led by policy-sensitive short maturities, pushing the yield on two-year notes lower by as much as 10 basis points. Those moves soon lost momentum, however, after a gauge of US manufacturing activity showed a bigger-than-expected gain in prices paid by factories.
Late in New York trading, yields hovered near session highs, with the two-year up 3.5 basis points to top 4.20%. The moves were larger for longer-dated benchmarks, with both 10- and 30-year yields up nearly 10 basis points.
Yields had climbed roughly 60 basis points throughout October, causing a Bloomberg gauge of the debt posted its worst monthly loss since 2022. Leading into Friday’s data, traders in the options markets had been hedging against a deeper selloff in Treasuries and liquidating positions in anticipation of next week’s risk events.
Volatility has been rising as Kamala Harris and Donald Trump face off in a tight race for the White House on Nov. 5. The ICE BofA Move Index, a closely watched gauge of US bond-market volatility, closed at its highest this year this week, showing that traders are paying up to protect against increased turbulence. The Fed meets on Nov. 7, just two days after the vote.
“Clearly, there is risk next week in terms of uncertainty around the election,” said Roger Hallam, global head of rates at Vanguard. And the recent string of firmer data mean “the outcomes for Fed policy next year also widen — and that feeds into relative market volatility as well.”
Bond investors will also have to contend with a trio of Treasury auctions — including a sale of three-year notes Monday and the big quarterly 10-year and 30-year new issues on Tuesday and Wednesday. Each sale will take place a day earlier than normal practice, giving dealers less time to prepare. Monday is a bank holiday in Japan, further curtailing the pre-auction period.
“Next week is an uncertain environment and one where the market is a little less willing to take down risk,” said Hallam. “There is a bit of a concession being built in ahead of the next Treasury supply to ensure it goes smoother.”
--With assistance from Anya Andrianova, Edward Bolingbroke and Ye Xie.
(Updates prices in 10th paragraph for late NY trading.)
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