bond market rate hike

Bond Market Reacts to Rate Hike Concerns

The bond market experienced a renewed selloff in the wake of a significant surge in US hiring, heightening speculations that the Federal Reserve will opt for another interest rate hike this year, reports Bloomberg. September’s robust employment figures further underscored the resilience of the US economy, even in the face of the central bank’s assertive monetary policy tightening in the preceding year. Employers exceeded economists’ projections by creating twice as many jobs last month.


The burgeoning strength of the US economy is driving policymakers to redouble their efforts in combating inflation, resulting in a sharp upswing in Treasury yields across various maturities. Although the increase eventually moderated to a few basis points, 30-year bond yields skyrocketed to an unprecedented 16-year high of 5.05%, before retreating to a mere 2 basis points. Similarly, ten-year yields initially peaked at 4.89%, before regressing to their present level of 4.77%.


In parallel, futures traders continue to factor in a high likelihood of the central bank raising its benchmark rate by a quarter percentage point at the upcoming December meeting. However, opinions on the ramifications of this development vary. Chief Economic Advisor of Allianz SE, Mohamed El-Erian, voiced concerns on Bloomberg Television, suggesting that this surge could potentially spell adversity for the economy. This descent in the bond market’s performance over the week has cast a pall on stock prices, potentially posing a threat to further economic expansion.


The ten-year Treasury yield benchmark has surged by nearly a fifth of a percentage point in the past week, marking its most substantial leap since the previous May. Gregory Faranello, Head of US Rates Trading and Strategy for AmeriVet Securities, asserts that the consistent robustness exhibited in the job market is indicative of yields continuing their upward trajectory. This shift in market dynamics can be attributed to a hawkish Fed outlook, which envisions elevated policy measures persisting well into 2024, as the US federal government plans to increase the debt supply in the forthcoming months.


Currently, the 30-year bond yield lingers approximately 16 basis points below two-year Treasury rates, a notable decline from the more than one full percentage point disparity observed in July. The ultimate decision regarding the Fed rate will be announced next month, with futures markets indicating a likelihood of a 13 basis point tightening beyond the current effective fed funds rate of 5.33%. Given the robust condition of the US labor market, Alan Ruskin, Chief International Strategist at Deutsche Bank, anticipates the Fed will continue its incremental rate hikes.


In summation, the recent surge in the bond market, driven by robust employment figures, has amplified concerns of an impending rate hike, highlighting the intricate interplay between economic indicators and monetary policy. This selloff in the US bond market serves as a consequential aftermath of last month’s robust employment figures. While the market promptly responded with a surge following the rise in debt yields observed the preceding Monday, traders harbor mixed expectations for the future.

Source: Bloomberg

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