Treasuries Rebound Raises Stakes for Job Data as Rate Hikes Loom

(Bloomberg) -- Bond traders are betting so heavily that more interest-rate hikes from the Federal Reserve are on the horizon that even the anticipated slowdown in job growth is unlikely to significantly alter the outlook.

The US Labor Department's employment report on Friday is expected to show that payrolls expanded by about 90,000 in September, down from 162,000 the month before, according to economists surveyed by Bloomberg.

Yet those gains would be roughly in line with the monthly average so far this year and point to continuing strength in the job market, giving the central bank room to keep tightening monetary policy as it focuses on bringing down inflation that's been stuck over its target for the past five years.

"You would need something close to zero or even negative — and I think you'd really need a downside surprise in the wage data" — for Treasuries to gain, said Steve Boothe, head of investment grade and portfolio manager at T. Rowe Price Group Inc. "The bar for the labor market to be the catalyst for a rally here is actually pretty high."

The bond-market selloff eased in the US on Thursday as escalating worries about rising debt loads in Europe sent investors into Treasuries as a haven and two Fed officials — Michelle Bowman and Philip Jefferson — suggested policymakers should take more time before deciding whether additional hikes are needed. That sent two-year yields down by about 10 basis points to below 4.8% and dragged those on 10-year bonds back from a 24-year high.

But analysts said the rebound had little to do with a change in the US outlook or an easing in the pressures that have been sending yields higher. Oil prices are hovering around $100 a barrel, with little signs of progress toward ending the Iran war. The federal government's heavy deficit spending and the artificial intelligence boom are pouring fuel on a steadily expanding economy. And inflation this year has jumped above 3%.

While futures traders have dialed back the scale of their rate-hike bets slightly — and don't anticipate another move until the December meeting — they continue to expect at least three quarter-point increases by July.

The scope of the recent selloff, however, has made the bond market unpredictable.