Treasury yields’ wrecking-ball surge gets fresh fuel after blowout jobs report

By Davide Barbuscia and David Randall

NEW YORK (Reuters) -The U.S. Treasury yield surge that has shaken markets in recent weeks may have further to run, after a stunningly strong U.S. jobs report bolstered the case for more tightening from the Federal Reserve.

Jobs growth for September nearly doubled expectations as nonfarm payrolls increased by 336,000 for the month, strengthening views that policymakers will need to keep interest rates elevated to cool inflation.

That’s bad news for investors who were looking for a respite from a rise in Treasury yields that has wreaked havoc throughout markets over the past month, bruising stocks, supercharging the dollar and pushing mortgage rates to their highest levels in more than two decades. Treasury yields move inversely to bond prices.

“It’s quite a report,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The likelihood of a Fed hike in November has risen. This is not what the market was looking for.”

Two-year yields, which move more closely in line with monetary policy expectations, jumped by about six basis points after the report while benchmark 10-year yields surged over 10 basis points to nearly 4.9%, although they later pared some of the gains. On the long end of the curve, 30-year yields surged above 5% hitting their highest since 2007. They were recently at 4.9%.

The S&P 500 dropped in early trade but turned positive later and was recently up 1%. It was still down nearly 8% off from its July high.

Indeed, some saw positive elements in the report, where the unemployment rate was unchanged at an 18-month high of 3.8% in September and monthly wage growth stayed moderate.

“We’re downplaying the headline number a bit given that you aren’t seeing the same job gains” across the jobs surveys, said Jake Schurmeier, a portfolio manager at Harbor Capital. “The market is taking this as a further signal that growth remains strong despite the impressive hiking cycle we’ve seen.”

Alex McGrath, chief investment officer for NorthEnd Private Wealth, said markets might “question the veracity of this report” because of its sharp contrast with the ADP National Employment Report, which showed U.S. private payrolls grew far less than expected in September.

“That aside, this move in yields will continue to serve as a gale force headwind to equities through the end of the year should they remain elevated at these levels,” he wrote.

The Cboe Volatility Index – an options-based gauge of investors’ expectation for near-term stock market gyrations – on Friday approached a five-month high hit earlier this week before reversing.

Still, the index’s level of 17.54 remains well off past highs. Some analysts said that could suggest the selloff in the market is far from exhausted.


Fed funds futures traders on Friday added to bets that the Federal Reserve will raise interest rates before the end of the year, and keep them elevated for longer next year.

Implied yields on contracts tied to the Fed policy rate pointed to a nearly 50% chance the Fed will lift the benchmark short-term borrowing rate a quarter of a percentage point to the 5.50%-5.75% range at its December meeting.

Despite those increased expectations, some investors said the selloff in Treasuries had tightened financial conditions for the Fed, potentially precluding the need for more rate hikes.

“While this report clearly makes it a closer call whether or not they will hike again this fall, tighter financial conditions are doing much of the work for them,” wrote PIMCO economist Tiffany Wilding.

However, Craig Ellinger, head of Americas fixed income at UBS Asset Management, believes more rate increases could be in store. Real rates – which show how much investors can earn on Treasuries after stripping out inflation – may not yet be restrictive enough, he said, despite their recent surge to 15-year highs.

“There needs to be probably a little bit more pressure to contain and constrain growth if the Fed does in fact want to reduce inflation,” he said.

Ellinger plans to maintain exposure to short-term Treasuries and corporate bonds.

“My plan is to not have a long-term plan … Once the Fed becomes less data dependent, I will become more confident in longer term strategies around fixed income,” he said.

(Reporting by Davide Barbuscia, David Randall, Saqib Iqbal Ahmed, Stephen Culp and Sruthi Shankar; Editing by Ira Iosebashvili, Chizu Nomiyama and Diane Craft)