A spate of slowing employment metrics this week, crowned by Friday’s August payrolls report, has shifted market sentiment in favor of owning policy-sensitive two-year Treasuries, which BlackRock Inc.’s Jeff Rosenberg called a “screaming buy.”
The prospect of the Fed wrapping up its most aggressive tightening campaign in decades also drew investors to another favorite end-of-cycle trade – a steepening yield curve. The wager is that as the focus shifts to the timing of a potential Fed pivot to easing, short-maturity notes will fare better than long-term bonds. The strategy may also be benefiting from a seasonal tendency: Companies typically rush to sell debt after the US Labor Day holiday, putting pressure on long-duration bonds.
The jobs data leaves “the bond market comfortable with the view that the Fed is on hold for now and maybe done for the cycle,” said Michael Cudzil, a portfolio manager at Pacific Investment Management Co., which oversees $1.8 trillion. “If they are done for the hiking cycle, it’s then about looking at the first cut that leads to steeper curves.”
BloombergWhile inflation has been trending lower in recent months, a resilient job market has been the main stumbling block for the Fed to stop hiking after raising the borrowing costs by 525 basis points since March 2022, to a range of 5.25%-5.5%. But now the labor backdrop appears to be cooling. A government report Friday showed that the unemployment rate jumped to 3.8%, a level last seen in February 2022, and wage growth moderated. It was the third soft labor-market release of the week, following weaker-than-expected job openings data and an ADP Research Institute report showing slowing job additions by US companies.
Bond investors cheered the data after a relentless selloff in August saw 10-year yields hit the highest since 2007. The rate, a benchmark for global borrowing, ended the week below 4.2%.
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