Global Market Shockwaves: How U.S. Treasury Selloff Following Jobs Data Affects Investors Worldwide

(Bloomberg) — Treasuries continued their decline following a strong employment report on Friday. This report has fueled speculation that the Federal Reserve is likely to hold off on cutting interest rates this year.

The yield on the 10-year US Treasury climbed to around 4.8% on Monday, the highest since late 2023. This marks a significant increase since mid-September. The yield on the 30-year Treasury has also approached 5%, having briefly surpassed this threshold on Friday for the first time in over a year.

The rise in yields is driven by concerns about ongoing inflation and rising government debt. Futures traders now believe the Fed may not ease its monetary policy until late 2025. Additionally, the recent spike in oil prices adds pressure, suggesting inflation could rise further.

Kevin Flanagan, head of fixed-income strategy at WisdomTree, noted, “The labor market remains strong and resilient.” He speculated that the 10-year yield could soon reach 5% as well.

Oil prices surged on Friday following the US’s announcement of severe sanctions on Russia’s oil trade, and this upward trend continued on Monday.

The resilience of the US economy was further highlighted on Friday, with non-farm payrolls rising by 256,000 in December. This figure is the highest since March and exceeded nearly all economist forecasts from a Bloomberg survey.

In light of the strong jobs data, swaps traders have adjusted their expectations for Fed rate cuts. They now anticipate only a single quarter-point cut this year, a change from previous forecasts that suggested two cuts. The next anticipated cut isn’t expected until around October.

Major Wall Street economists have also revised their predictions. Analysts at Barclays have lowered their outlook to one cut instead of two, while Citigroup has pushed the date for the cut back to May. JPMorgan Chase now expects two smaller reductions, down from three.

These adjustments in the Fed outlook have had a ripple effect across global markets, boosting the dollar to a two-year high and putting pressure on European bonds.

Chris Turner, a foreign-exchange strategist at ING, reflected on the situation, stating, “The critical question for the market is whether the Fed needs to cut rates at all this year.” This dollar strength and firm US yields are testing the financial system’s resilience.

Market watchers are keen to see how much higher US yields can go, with some speculating that the Fed might raise rates again. Upcoming producer-price data on Tuesday and consumer-price figures on Wednesday will be closely monitored.

Laura Cooper, a global investment strategist at Nuveen, emphasized the importance of inflation data this week, noting, “The risk is that the narrative shifts towards rate hikes.”

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