TLT, Other Bond ETFs, Tumble After Solid Jobs Report
Bond ETFs tumbled on Friday after the government reported stronger-than-expected jobs figures for May, pushing hopes for an interest rate cut further into the future, even as the Federal Reserve is set to decide the issue in the middle of next week.
Employers added 272,000 jobs in May versus the 180,000 that economists were expecting, while average hourly earnings grew by 0.4% month-over-month, faster than the 0.3% that was expected.
Yields on the 10-year and 30-year Treasury bonds surged by 13 basis points and 10 basis points, respectively, taking them up to 4.41% and 4.53%.
The job market's strength apparently surprised bond investors after several other economic reports showed the economy weakening in recent weeks.
The iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares 20+ Year Treasury Bond ETF (TLT) were last trading lower by 1% and 1.6%, respectively.
After the jobs report, traders reevaluated their expectations for potential Federal Reserve interest rate cuts. Probabilities based on the pricing of fed funds futures suggest that the central bank will only slash rates one time this year in either November or December, while there’s a 12% chance that the Fed might not cut rates at all this year.
If the Fed ends up not cutting in 2024, it would starkly contrast with the rate decisions taken by other central banks, like the European Central Bank and the Bank of Canada, which both cut rates this week.
Still, with the U.S. economy humming and inflation slowly declining, the lack of big rate cuts from the Fed may ultimately not harm markets. Bond bulls hoping for a quick move down in rates and a surge in bond prices may be among those who do take a hit.
For others such as bond investors putting new money to work at high rates and stock investors who want to see corporate earnings continue to grow briskly, the strong economy is a plus.
Regardless, 272,000 jobs for May isn’t so large that it will change the Fed’s view on the economy dramatically. The uptick in the unemployment rate, from 3.9% to 4% (the highest level since Jan. 22) tempers the headline jobs gain a bit.