U.S. Treasury yields climbed higher on Thursday following the release of better-than-expected jobs data and recent commentary from Federal Reserve officials suggesting fewer interest rate cuts in 2024.
The yield on the benchmark 10-year Treasury note rose over 6 basis points to 4.16%, while the 2-year Treasury yield added around 3 basis points to hit 4.45%. Yields move opposite to prices.
This rise in Treasury yields indicates bond investors are selling Treasuries, pushing the prices down and yields up, as expectations shift for future Fed policy.
The catalyst behind the latest move was a new Labor Department report showing initial jobless claims for unemployment insurance decreased to 218,000 last week. This reading came in below economist estimates of 220,000 claims and suggests ongoing resilience in the job market.
With employers holding onto workers and unemployment remaining low, it signals the labor market remains fairly tight. A tight job market gives the Fed less room to aggressively cut interest rates to spur economic growth.
The jobs data follows recent commentary from multiple Fed officials about interest rate policy in 2024.
Minneapolis Fed President Neel Kashkari said this week he expects only 2-3 rate cuts by the Fed next year, rather than his prior estimate of up to 5 cuts.
Similarly, Fed Governor Lisa Cook said she anticipates “a couple” of rate cuts in 2024 as inflation continues to moderate.
Markets are now scaling back expectations for the pace and magnitude of rate reductions next year.
Fed Chair Jerome Powell fueled this reassessment last week when he stated policymakers plan to take a cautious approach to cutting interest rates. He said they will be closely monitoring incoming economic data.
Powell’s remarks broke from his previously more dovish tone and put a damper on market hopes for a rate cut as early as March this year.
With the Fed’s benchmark rate currently at 4.5-4.75%, less aggressive rate cuts mean higher rates, and thus yields, for longer. This is the primary factor pushing Treasury yields higher right now.
The next major data point that could shift rate cut expectations will be January’s Consumer Price Index reading due next week.
If the CPI shows inflation pressures moderating further, it will boost the case for fewer Fed rate hikes. On the other hand, a hotter inflation print could put rate cuts later in 2024 back on the table.
Beyond the CPI, Treasury yields will remain sensitive to economic data releases, Fed official speeches, and signals about quantitative tightening in the coming months.
Quantitative tightening, the Fed’s move to reduce its balance sheet after years of asset purchases, is another form of monetary policy tightening along with rate hikes. The pace of QT could impact yields.
For now, Treasuries and the yield curve may face upward pressure if the labor market and consumer spending hold up better than expected. This gives the Fed room to keep rates higher for longer to ensure inflation continues trending down.
In turn, investors will demand higher yields on bonds to compensate for reduced expectations of the Fed cutting rates, driving yields upwards across the curve.
The direction yields take from here will come down to the interplay between incoming economic data and how Fed officials interpret it with regards to their tightening cycle. The months ahead will bring more clarity on whether the Fed can achieve a soft landing.