On Monday, the slump in the US treasury bond bond market was further amplified, and the yield of benchmark 10-year US treasury bond returned to above the 4% threshold, the highest level since August. Due to the unexpectedly higher than expected US employment report released last Friday, traders have been forced to reassess their forecasts for the direction of the Federal Reserve's monetary policy outlook.
Market data shows that as of the end of the New York session, yields on US Treasury bonds of all maturities have risen across the board. Among them, the yield of 2-year US Treasury bonds rose 8.8 basis points to 4.006%, 3-year US Treasury bonds rose 7.6 basis points to 3.903%, 5-year US Treasury bonds rose 7.4 basis points to 3.871%, 10-year US Treasury bonds rose 7.1 basis points to 4.032%, and 30-year US Treasury bonds rose 6.2 basis points to 4.308%.
Analysts said that due to the stronger than expected US nonfarm employment report released last Friday, which triggered the expectation that the Federal Reserve would slow down the pace of interest rate reduction, the yield of US 10-year treasury bond bonds continued to rise in the past two trading days. It once climbed to 4.033% in the afternoon of Monday, the highest level since August 1, and also broke the 4% integer threshold for the first time since August 8, because market traders have almost completely ruled out the possibility of the Federal Reserve cutting interest rates by another 50 basis points at the policy meeting in November.
According to the Federal Reserve Observation Tool of the Chicago Mercantile Exchange, interest rate futures market traders latest estimate that the probability of the Federal Reserve cutting interest rates by 25 basis points at its early next month meeting is as high as 87%, the probability of not cutting interest rates is about 13%, and the probability of cutting interest rates by 50 basis points has "disappeared". You should know that a week ago, the probability of the aforementioned back-to-back aggressive interest rate cuts was once as high as nearly 40%.
The figure below is provided by Ben Emons, founder of Fed Watch Advisors, which shows how "earth shaking" the expected changes in the above interest rate market are. The strong non-agricultural data in September greatly reduced the possibility of the Federal Reserve cutting interest rates by 50 basis points (the blue line in the figure), and also pushed up the yield of 10-year treasury bond bonds (the orange line in the figure).
Gennadiy Goldberg, Chief US Interest Rate Strategist at TD Securities in New York, said, "Based solely on the strength of the data, the market quickly shifted from talking about a 50 basis point rate cut to possibly not cutting rates in November
The open interest contract data tracking futures market positions on Monday showed a significant drop in multiple contracts linked to the secured overnight funding rate (SOFR), indicating the surrender of long positions. Meanwhile, in the options market, there have been numerous new "hawkish" hedging strategies aimed at the Federal Reserve only cutting interest rates by another 25 basis points this year.
Goldman Sachs strategist George Cole and others wrote in a report that they had originally expected US bond yields to rise, but it is expected to be gradually adjusted. The strength of the September employment report may have accelerated this process, as people resume discussing the extent of policy restrictions and the possible depth of the Federal Reserve's policy cuts after the non farm payroll release.
From our perspective, the 10-year Treasury yield is trying to figure out how the Fed will ultimately determine interest rates, "said Michael Reynolds, Vice President of Investment Strategy at Glenmede
Reynolds stated that a soft landing is our fundamental prediction. As traders reduce their expected interest rate cuts this year, stock investors are "re evaluating the fair value of current stocks
BMO Capital Market Strategists Ian Lyngen and Vail Hartman stated that the outlook for a "no landing" outcome related to the US economy has improved after the strong employment report was released. Intuitively, investors have significantly reduced their expectations for the Federal Reserve's recent interest rate cuts. They wrote in a report that the most relevant changes in market participants' views on the path of interest rates "involve expectations for the speed of the Federal Reserve's rate cuts. People have abandoned the assumption that interest rates will steadily and unpredictably return to neutrality, and instead expect a pause (rate cut) during the normalization process
Did the Federal Reserve make a mistake in aggressively cutting interest rates in September?
It is worth mentioning that the bond market trend on Monday was completely opposite to the situation a few months ago, when the US labor market seemed to be weakening.
On August 2nd, the US Department of Labor announced that the non farm payroll for July only increased by 114000 people, and the unemployment rate reached its highest level in nearly three years of 4.3%. The weak employment data had heightened concerns about an economic recession at the time, and within a few days, the 10-year US Treasury yield fell to 3.782%, the lowest closing level since July 2023. As the bet on aggressive interest rate cuts by the Federal Reserve continues to heat up, the Fed finally opened the curtain of this round of monetary easing cycle with a significant 50 basis point rate cut in September.
However, now that the US economy, especially labor market data, has improved again, many industry insiders have begun to question the Federal Reserve's decision to aggressively cut interest rates in September.
Former US Treasury Secretary and Harvard University economist Larry Summers wrote on X platform last Friday, "Today's employment report confirms people's speculation that we are in an environment of high and medium interest rates, and responsible monetary policy requires cautious interest rate cuts
Summers said, "In hindsight, it was a mistake to cut interest rates by 50 basis points in September, although the consequences were not serious. With these data, 'no landing' and 'hard landing' are risks that the Federal Reserve must consider. Wage growth is still far higher than the level before the COVID-19 epidemic, and does not seem to have slowed down."
At present, the Federal Reserve is seeking to achieve an economic soft landing, where the inflation rate drops to around the Fed's 2% price target without triggering an economic recession. In contrast, 'no landing' means a rebound in inflation, while 'hard landing' means an economic recession.
Another financial celebrity and well-known investor, Stanley Druckenmiller, recently expressed caution about the Fed's excessive interest rate cuts. He was once the partner of Wall Street tycoon George Soros. Druckenmiller wrote in an email after the release of the non farm payroll report, 'I hope the Federal Reserve will not be trapped by forward guidance like it was in 2021.'. He refers to the Federal Reserve's unwillingness to raise interest rates after inflation began to take off in 2021. And now the problem lies in the interest rate cut.
GDP is above trend, corporate profits are strong, the stock market has reached a historic high, credit is very tight, and gold has hit a new high. Where are the limitations of monetary policy? "Said Druckenmiller.
Obviously, Druckenmiller's underlying message is that, given these financial trends, the Federal Reserve's current policy is not too tight. Therefore, the Federal Reserve does not need to significantly lower interest rates. It is worth mentioning that Druckenmiller said last week before the release of the non farm report that he was shorting US bonds.