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(Bloomberg) -- Treasuries extended their drop after Friday’s blowout employment report strengthened speculation that the Federal Reserve is poised to pause its interest-rate cuts for virtually all of this year.
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Yields on benchmark US 10-year notes edged up on Monday to hover near the highest since late 2023 at about 4.77%, capping a more than percentage-point jump since mid-September. Meanwhile, the 30-year yield headed back toward 5% after breaching that level on Friday for the first time in more than a year.
The movements were spurred by jitters around persistent inflation and ballooning government debt, leading futures traders to wager that the Fed is unlikely to ease monetary policy again until late 2025. A continued spike in oil prices is also adding to concerns that inflation may push higher.
“We are seeing 2024 went out with a bang, the labor market continued to be solid and resilient,” said Kevin Flanagan, head of fixed income strategy at WisdomTree. “It’s probably just a matter of days or weeks when the 10-year joins the 5% trifecta.”
Oil prices rose sharply on Friday, with increases continuing Monday after the US announced the most sweeping and aggressive sanctions yet on Russia’s oil trade.
Markets were given further evidence of the resilience of the US economy on Friday as non-farm payrolls increased 256,000 in December, the most since March and above all-but-one forecast in a Bloomberg survey of economists.
Swaps traders are now pricing in just one quarter-point rate cut from the Fed this year, a shift from before Friday’s jobs data, when they were still giving strong odds to two such moves. The quarter-point reduction isn’t fully priced until around October.
A plethora of Wall Street economists also scaled back or scrapped forecasts for additional Fed rate cuts this year. Economists at Barclays shifted down to forecasting one quarter-point reduction from a previous call for two, while those at Citigroup Inc. pushed out the next cut to May from January. At JPMorgan Chase & Co., the economics team now sees two quarter-point reductions this year after previously forecasting three.
The high yields, however, have drawn some dip-buying, helping pull yields down from their early morning highs on Monday.
Still the overall recalibration of the Fed outlook has rippled across global markets, with a gauge of the dollar surging to a two-year high and European bonds under pressure.