US Treasury yields retreat on wage growth data

Friday’s US economic data produced a cascading drop in rates across the Treasury market, pushing the policy-sensitive 2-year and benchmark 10-year yields to their lowest levels of the new year.

The 2-year yield which moves in coordination with expectations around the path of Fed’s policy, fell 19.1 basis points to below 4.3% after December’s US jobs report included signs of slowing wage growth.

The 10-year rate TMUBMUSD10Y, 3.562% reacted about 90 minutes later, dropping below 3.6% after a barometer of US business conditions at service-oriented companies sank last month. Those moves were then followed by the 30-year rate TMUBMUSD30Y, 3.686% falling to almost 3.7%.

Friday’s data gave the financial market reasons to hope that disinflationary forces are on the horizon and the world’s largest economy is slowing by enough that the Fed can shift away from its focus on combating inflation through rate hikes. The 2-year yield scored its biggest one-day drop since Nov. 10 and fell to its lowest level since Dec. 21.

Fed funds futures traders boosted their expectations for smaller-than-usual, 25-basis-point rate hikes in February and March, as well as for rate cuts toward the end of this year, though the market and policy makers have long been at odds over the appropriate direction of monetary policy.

The payroll figures was good for the front end of the bond market; producing demand for shorter-term government debt that pushed down the 2-year yield.

The bond market, usually one of the first places in the financial market to size up the most likely outlooks for the economy and the trajectory of Fed moves, has been vacillating between two narratives.

Only one day earlier, traders were at least willing to reconsider the possibility that the Fed’s main policy target could get above 5% by March. Now, they see fresh reasons to doubt the Fed will be able to keep rates high, with Friday’s economic data only reinforcing the narrative that policy makers will be forced to pivot and cut rates toward the end of the year.