On October 11, U.S. Treasury yields experienced a general decline. However, the impact of last month’s unexpectedly strong non-farm payroll report has continued to reverberate, pushing Treasury yields higher across the board, particularly for long-term bonds. According to reports from Reuters, the 2-year Treasury yield fell by 5.7 basis points to 3.940%, marking its lowest level of the week, though it has climbed by 1.1 basis points over the past week. This inverse relationship between bond yields and prices remains significant.
The 10-year Treasury yield slipped by 2.1 basis points to 4.072% on the same day, contributing to a weekly increase of 9.2 basis points, totaling a 42.4 basis point rise over the last four weeks. Meanwhile, the 30-year yield saw a slight drop to 4.382%, with an overall weekly increase of 11.5 basis points and a cumulative rise of 40.5 basis points over the past month.
Despite signs of cooling inflation, the impact of a robust labor market continues to shape market expectations. The U.S. Department of Labor reported that the Producer Price Index (PPI) for September remained flat compared to August, falling short of economists’ expectations for a 0.1% increase. This suggests that inflationary pressures are being kept in check.
Russell, the Global Market Strategist at TradeStation, commented on the PPI data, stating, “Overall, as inflation eases, the influence of these numbers has weakened. Yields have recently risen significantly, but it’s unclear how justified further increases will be.”
The rise in Treasury yields primarily reflects the robust non-farm payroll figure of 254,000 jobs added in September, which greatly surpassed expectations. This unexpected strength has dampened hopes for a 50 basis point interest rate cut by the Federal Reserve next month, with some analysts even speculating that the Fed may hold off on making any changes before the end of the year.
The interplay between election dynamics and economic data also contributes to rising long-term yields. Since the Fed lowered rates by 50 basis points last month, the benchmark 10-year Treasury yield has surged nearly half a percent, from a low of 3.62% before the rate cut announcement to around 4.1%.
One significant factor driving this shift is the election effect, where candidates from both the Republican and Democratic parties are promising increased spending without presenting clear plans for deficit reduction. MUFG’s Chief U.S. Economic Strategist, Gokhberg, noted that betting odds for a Republican sweep of the White House and Congress have risen to 36%, while Vice President Kamala Harris stands at 26%, and a substantial Democratic win at 19%. Gokhberg suggests that should Trump implement his proposals, such as tax cuts and increased military spending, it could lead to a $7.5 trillion increase in the deficit over the next decade. Conversely, Harris’s plans might add around $3.5 trillion.
Some analysts forecast that if Trump wins the November presidential election and returns to the White House, the 10-year yield could soar to 5%. Gokhberg anticipates that if Trump emerges victorious, yields could reach 4.5% to 4.6%. However, if Harris wins and Congress is divided, yields may decline, although significant Democratic victories could lead to higher yields.
The strength in employment data, coupled with inflation concerns, has eroded market expectations for substantial Fed rate cuts, significantly influencing Treasury yield movements. For instance, the unexpected strength of the September non-farm payroll report suggests that the economy is not on the brink of recession, reducing the need for drastic rate cuts and prompting futures markets to adjust their interest rate forecasts. Currently, traders expect the federal funds rate at the end of 2025 to settle at 3.4%, compared to a previous estimate of 2.9%.
In recent weeks, rising tensions in the Middle East have heightened the risk of disruptions to energy infrastructure, leading to rising oil prices and rekindling inflation fears that could complicate the Fed’s rate reduction plans.
Schumacher, Chief U.S. Economic Strategist at Wells Fargo, indicated that the only circumstance that might lead to an immediate drop in Treasury yields would be a significant increase in the market’s expectation for Fed rate cuts. However, he predicts that once the November elections conclude, Treasury yields are likely to decrease, forecasting the 10-year yield to potentially fall to 3.75% by year-end, although slightly higher than his previous estimate of 3.5%.
