Key Takeaways
US Treasury yields climbed on Monday, with the 10-year benchmark rising five basis points to 4.41% as concerns over government borrowing and persistent inflation overshadowed the appeal of higher payouts for some investors.
"Even without the uncertainty from Iran, one could make the case that the economy doesn’t require meaningful easing at this point,” said Jonathan Cohn, head of US rates desk strategy at Nomura.
The move in the 10-year yield was mirrored by the rate-sensitive two-year note, which rose to 3.94%. The bond selloff came as Brent crude traded above $114 a barrel, fanning inflation fears that have led the market to completely price out interest-rate cuts for this year. The repricing marks a sharp reversal from January, when traders were betting on two 25-basis-point cuts.
The focus for investors now shifts to a heavy calendar of economic data and policy announcements. The US Treasury is expected on Wednesday to keep its quarterly refunding auction size at $125 billion, but Wall Street remains wary of the government's fiscal trajectory. The week culminates with Friday's employment report, which will test the economy's resilience.
Solid economic growth and high inflation have narrowed the path for any potential monetary easing from the Federal Reserve. The central bank held its policy rate steady in a 3.50% to 3.75% range at its last meeting, but the decision saw three dissents from officials who argued it was no longer appropriate to signal a bias toward rate cuts. Cleveland Fed President Beth Hammack, one of the dissenters, is scheduled to speak this week.
"If the Fed cuts, it’s not going to be because we got good news on inflation data,” said Vail Hartman, US rates strategist at BMO Capital Markets. “It’s going to be because we got bad news on the labor side.”
Economists surveyed by Bloomberg expect the US to have added just 65,000 non-farm jobs last month, a sharp drop from the surprisingly strong 178,000 jobs created in March. The unemployment rate is forecast to hold steady at 4.3 percent. A significant crack in the labor market would be needed to revive the case for rate cuts.
While the Fed's stance is critical, investors are also growing concerned about the US government's fiscal health. For the past two years, US debt managers have signaled steady auction sizes, but some dealers are questioning how long that can last.
The risk from rising government borrowing costs was underscored in the UK market, where the yield on 30-year government bonds recently hit 5.77%, its highest level since 1998. The selloff in UK gilts was fueled by fears of higher inflation and uncertainty about the government's fiscal plans. With the US Treasury planning to issue vast amounts of debt, investors are watching closely for any signs of strain.
"If you see the labor market data begin to crack, then cut expectations can reemerge in a more meaningful way,” Cohn said. “Absent that, I think the market will struggle to get back all the way to what we were pricing pre-war.”
This article is for informational purposes only and does not constitute investment advice.
