(Bloomberg) – The “no-landing” scenario, in which the U.S. economy continues to grow, inflation flares up again, and the Federal Reserve has little room to cut interest rates, has all but disappeared from the bond market conversation in recent months. was.
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All it took was a significantly worse pay statistic to bring it back.
Data showing the fastest job growth in six months, a surprising decline in the U.S. unemployment rate and rising wages sent U.S. Treasury yields soaring and investors expecting a bigger-than-usual 0.5-point rate cut next month. The bets that were placed on the market were furiously reversed. .
This is the latest painful readjustment for traders who had been bracing for slower growth, benign inflation and aggressive interest rate cuts by piling up short-term U.S. debt, which is sensitive to the Fed’s interest rates. Instead, Friday’s report reignited entirely new concerns about overheating, undermining a rally in U.S. Treasuries that had pushed two-year Treasury yields to multi-year lows.
“The pain trade has always had higher front-end interest rates because of the reduced rate cuts priced in,” said George Catrambone, head of fixed income at DWS Americas. “What’s likely to happen is either the Fed won’t cut rates any further, or they’ll actually have to raise rates.”
Much of the recent market debate has centered on whether the economy can achieve a “soft landing” of slowing without a recession, or a “hard landing” of a deep recession. The Fed itself has signaled it will shift its focus to preventing a deterioration in the job market after more than two years of battling inflation, and its pivot to rate cuts began at just over half a percentage point in September.
But Friday’s jobs report shows a disconnect from the Fed cutting interest rates at a time when stocks are at record highs, the economy is expanding at a steady pace, and inflation has not yet returned to the Fed’s target. It has become a material for people who think that. In short, an unlandable scenario.
Many prominent investors and economists, including Stanley Druckenmiller and Mohamed El-Erian, have warned that the Fed should not get bogged down in market predictions of rate cuts or its own predictions, with El-Erian saying, “Inflation is dead.” That’s not the case,” he warned. Former Treasury Secretary Larry Summers said in a post on XFriday that “no-landing” and “hard landing” are risks the Fed should consider, and that last month’s deep interest rate cuts “were a mistake.”
the story continues
For some, the combination of the Fed’s unusual interest rate cuts last month and China’s surprising economic stimulus efforts have tipped the balance away from growth concerns.
“A 50 basis point cut should no longer be an issue,” said Tracy Chen, portfolio manager at Brandywine Global Investment Management. “Fed easing and Chinese stimulus make a no-landing more likely.”
Meanwhile, concerns about inflation are reigniting due to soaring oil prices. The 10-year break-even interest rate, a gauge of bond traders’ inflation expectations, rebounded from a three-year low in mid-September to its highest level in two months. This comes ahead of key figures on consumer prices to be released next week.
Swap traders are pricing in 24 basis points of easing at the November Fed meeting, meaning a quarter-point cut is no longer considered guaranteed. A total of 150 basis points of easing has been factored in by October 2025, which has been revised downward from the approximately 200 basis point reduction forecast as of the end of September.
U.S. Treasuries rose for the fifth consecutive month, the most since 2010, as the Fed’s reduced expectations put a damper on the bond-buying frenzy. The 10-year Treasury yield has risen more than 30 basis points since last month’s Fed meeting. It is close to 4% for the first time since August.
Baylor Lancaster Samuel, Chief Investment Officer “We have evidence that it is healthy.” Amerant Investments Inc. “It definitely falls into the ‘be careful what you wish for’ category.”
This changing narrative has also upended the recent popular strategy of betting on aggressive Fed easing, so-called curve steepening. In such strategies, traders bet that short-term bonds will outperform long-term bonds. Instead, the two-year Treasury yield rose 36 basis points last week, its highest level since June 2022. The two-year yield was 3.9%, just 6 basis points below the 10-year yield, down from 22 basis points in late September.
Bloomberg strategist says…
“Yields rose on Friday as remaining longs stopped and investors aggressively sought to lock in interest rates before they rose. With signs of inflation fading and little concern about a labor market collapse, the economy is Since the momentum is also on a positive trajectory, a soft landing may be completely avoided and a no-landing may occur.
— Alyce Andres, Market Live Rates/FX Strategist
With renewed focus on inflation, next week’s consumer price data is attracting a lot of attention. The core consumer price index is expected to fall to 0.2% last month, after rising 0.3% in September. Fed President Christopher Waller said inflation data received just before the Sept. 18 policy meeting ultimately led him to support the half-point policy decision.
Indeed, current market pricing suggests that a soft landing scenario remains investors’ base scenario. The 10-year breakeven point is 2.2%, still roughly in line with the Fed’s 2% inflation target. Looking at the swaps market, traders expect the Fed to end its easing cycle at around 2.9% in 2027, consistent with a level widely considered neutral.
Jamie Patton, TCW’s co-head of global rates, said the latest data on employment is not enough to change the need for the Fed to stick to an accommodative path, since lower turnover, higher defaults and other He said this is because the data as a whole is affected. Interest rates on auto loans and credit cards point to a weakening job market and downside risks to the economy.
“Not one data point changes the macro view that the labor market is weak overall,” Patton said.
He said he took advantage of Friday’s selloff to buy more two-year and five-year bonds, making the curve of his position steeper. “Resurgent inflation concerns could prevent the Fed from cutting rates,” but that would risk the Fed keeping borrowing costs “too high for an extended period of time and ultimately causing a deeper economic downturn.” It will increase.
what to see
Economic data:
October 7: Consumer Finance. monthly budget statement
October 8: NFIB Small Businesses Optimistic. trade balance
October 9: MBA home loan application. Wholesale sales and inventory status
October 10: Consumer Price Index. first unemployment insurance claim
October 11: Producer Price Index. University of Michigan, sentiment and inflation expectations
Fed Calendar:
October 7: Federal Reserve President Michelle Bowman. Minneapolis Fed President Neel Kashkari: Atlanta Fed President Rafael Bostic. St. Louis Fed President Alberto Moussallem
October 8: Federal Reserve President Adriana Kugler. Boston Fed President Susan Collins. Fed Vice Chairman Philip Jefferson; Bostic
October 9: September FOMC Minutes. Dallas Fed President Laurie Logan. Chicago Fed President Austan Goolsby. San Francisco Fed President Mary Daly. Collins. jefferson. Bostic
October 10: Richmond Fed President Tom Birkin. Fed Governor Lisa Cook. New York Fed President John Williams
October 11: Goolsby. Logan. bowman
Auction calendar:
October 7th: Bills for 13 and 26 weeks.
October 8: CMB for 42 days. 3 years worth of notes
October 9: Bill for 17 weeks. 10 years worth of notes
October 10: Bills for 4 and 8 weeks. 30 year bond
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