Treasury yields are ending the week higher as traders unwind their positioning in anticipation of risks tied to the election, a likely interest-rate cut and a three big debt auctions in the U.S..
Yields climbed across the curve on Friday, reversing an early decline that came after data showed the economy generated just 12,000 jobs last month amid storms and strikes. Longer-dated yields led the advance in New York afternoon trading, while a key gauge of the dollar headed for its strongest closing level since July.
"This is a time when you've got to take a very holistic view," Mohamed El-Erian, president of Queens' College, Cambridge and Bloomberg Opinion columnist, said on Bloomberg TV. "We have some major events coming up."
Traders held tight to expectations that policymakers will cut rates by a quarter-point on Nov. 7 and again on Dec. 18, pricing in 44 basis points by year's end. They see 57 basis points of cumulative easing by the end of January, implying the potential that Fed officials pause their reductions early next year.
Unlike last month, when several banks changed their Fed forecasts based on stronger-than-expected employment data, the October report drew only affirmations of the widespread forecast for quarter-point rate cuts next week and in December. Citigroup stuck with its call for a half-point move in December.
Friday's job report showed just 12,000 jobs created in October, with severe hurricanes and a major strike causing the data to come in well below the median economist forecast of 100,000. The prior month's total was revised lower to 223,000 from 254,000.
While the Fed will likely attribute some of the weakness in today's data to one-off factors, the softness in today's data argues for the Fed to continue its easing cycle at next week's meeting," said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management. "Sky clearing for a November 25-basis-point cut."
To Kevin Flanagan, head of fixed income strategy at WisdomTree, a pause in the Fed's rate-cutting cycle after two more quarter-point reductions in 2024 would likely leave Treasury yields stuck around their current levels.
"Low conviction is in part due to Tuesday's US presidential election and Thursday's Federal Reserve meeting. Had it not been for these two pending events, a big miss on headline payrolls and downward revisions would have elicited a much bigger slide in yields," said Bloomberg strategist Alyce Andres.
An early and brief rally in Treasurys was led by policy-sensitive short maturities, pushing the yield on two-year notes lower by as much as 10 basis points. Those moves soon lost momentum, however, after a gauge of U.S. manufacturing activity showed a bigger-than-expected gain in prices paid by factories.
