For the first time since the Fed began raising interest rates nearly 18 months ago, there have been enough cracks in the labour market, leading some bond investors to bet more boldly that the tightening cycle will eventually end.
A series of slowing employment indicators in the United States on Monday, led by Friday's August non-farm payrolls report, have changed market sentiment in favor of holding policy-sensitive two-year Treasuries. Blackrock's Jeff Rosenberg called it "screaming buying."
The prospect of the Fed ending its most aggressive tightening in decades has also attracted investors to another of the most popular end-of-cycle deals, the steep yield curve. As the focus turns to the timing when the Fed may turn to easing, bet that short-term bonds will outperform long-term ones. The strategy may also benefit from seasonal trends: companies are usually eager to sell debt after the International Labour Day holiday in the US, putting pressure on long-term bonds.
Michael Kuzier, a portfolio manager at Pimco, which manages $1.8 trillion, said the jobs data made "the bond market satisfied with the view that the Fed is currently on hold and could end the cycle".
Despite a downward trend in US inflation in recent months, borrowing costs have risen by 525 basis points since March 2022 to a range of 5.25 per cent and 5.5 per cent, and the job market has been the main obstacle for the Fed to stop raising interest rates.
But now the labour market seems to be cooling. The unemployment rate jumped to 3.8% and wage growth slowed, according to a u.s. jobs report on Friday. This is the third weak labor market data released this week after weaker-than-expected vacancy data and a report by the ADP Research Institute showing a slowdown in job creation at US companies.
Bond investors cheered the data after a sustained sell-off in August sent 10-year Treasury yields to their highest level since 2007. Interest rates, the global benchmark for borrowing, closed below 4.2 per cent this week.