The Treasury market’s willingness to absorb a robust jobs report suggests it is “applying a new lens” to economic data following the recent election.
The US Treasury market retreated from a significant weekly gain after strong October employment figures revived expectations for a Federal Reserve interest-rate hike in December.
The US midterm elections on Tuesday (Nov 3) triggered a sell-off in major technology stocks and a decline in oil prices, which bolstered US government bonds and pushed yields to their lowest levels since early September.
This momentum stalled on Friday as the stock market steadied and the employment data challenged predictions of an economic slowdown.
The bond market’s initial reaction to the report faded as the day progressed, leaving most of the weekly gains intact. Only short-term yields—which are more sensitive to the Fed’s interest-rate trajectory—remained notably higher as traders increased the probability of a quarter-point hike during the December 9 meeting.
The Treasury market’s tolerance for the robust jobs report suggests it is “applying a new lens” to economic data after the election, which flipped control of Congress, said George Goncalves, head of US macro strategy at MUFG.
“We are heading into a mixed government that could see growth constrained, from fiscal gridlock and less (artificial intelligence) spending.”
The Democratic sweep of Congress in Tuesday’s US midterm elections heightened concerns regarding the long-termtructure. Investors sought refuge in bonds as the Nasdaq 100 index plummeted 6.4 per cent on Thursday, marking its largest daily decline since March 2020
The resulting demand for Treasuries—extending a shift from stocks to bonds that began a month ago—pushed the two-year yield below 4.5 per cent and the 10-year toward 4.8 per cent, levels not seen since early September.
On Friday, the two-year yield climbed as much as nine basis points to 4.55 per cent before easing to approximately 4.51 per cent. The Nasdaq 100 index rose 1.7 per cent after earlier gains of up to 2.6 per cent.
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San Francisco Fed president Mary Daly, who will be a voting member of the Fed’s rate-setting body in 2027, stated after the employment data on Friday that a solid job market provides the Fed with the latitude to raise rates further. The US central bank raised rates in September for the first time since 2023 in an effort to combat inflation that remains above its 2 per cent target.
Policymakers are also wary of the risk that the AI investment boom could contribute to higher inflation in the near term, St Louis Fed president Alberto Musalem noted on Friday. Musalem is scheduled to vote on policy in 2028.
The employment figures led to a slight rise in market-implied expectations for additional rate hikes by the US central bank. Swap contracts tied to future Fed actions priced in roughly 20 basis points of tightening for the December 9 meeting, up from approximately 17 basis points on Thursday and 19 basis points prior to the jobs report.
Contracts expiring in mid-2027 priced in about 46 basis points of tightening, compared with 44 basis points before the jobs data and 38 basis points on Thursday. The employment report indicated that the US added 165,000 jobs in October, surpassing all estimates in a Bloomberg survey. Wage growth unexpectedly accelerated, and the unemployment rate, which was expected to remain steady, fell to 4.1 per cent.
“The economy is still functioning well at higher yields and today’s job number proves it,” said Tim Musial, head of fixed income for CIBC Private Wealth.
Prior to the release of the jobs data—which also featured upward revisions to job creation figures for August and September—bond investors had signaled they were ready to purchase Treasuries if the data caused yields to rise, as strong employment numbers favoring Fed rate hikes could lead to further weakness in equities.
“If risk markets start to view strong data as bad news with expectations for higher rates, this could dampen some of the move higher in rates as flight to quality comes back into play,” said Molly Brooks, US rates strategist at TD Securities.
The Fed raised rates in September after an oil price surge caused by the US war on Iran kept inflation elevated, while the AI investment boom supported US stocks. Expectations for further hikes subsequently declined, particularly after the central bank held rates steady in October, noting that economic conditions allowed for waiting on additional data to guide its next move.
That decision will incorporate not only the October consumer price index data due next week but also the November employment figures on December 4.
This week’s decline in crude oil prices to their lowest levels in two months—partly driven by the prospect that the election results will lead to a faster conclusion to the Iran war—has triggered a collapse in market-implied inflation expectations.
The breakeven rate for five-year Treasury Inflation-Protected Securities (TIPS)—which represents the average CPI rate required to match the return from higher-yielding standard Treasuries—fell to about 2.3 per cent this week from 2.5 per cent at the end of last week.
Meanwhile, Friday’s market activity increased the expected yield for the first of next week’s three auctions of longer-term Treasury debt. Monday’s US$58 billion auction of three-year notes was indicated around 4.59 per cent. The October three-year note auction resulted in a yield of 4.932 per cent, the highest since 2006.
