10-Year Yield Up 0.15% as Fed, Jobs Report Jolt Treasury Market

The fixed income market is being affected by a reevaluation of the Federal Reserve's timeline for interest rate cuts, which is increasing risk for investors who anticipate that the tremendous rally that sent bonds higher at the end of 2023 will continue this year.

With hopes that the Fed might lower rates as soon as this year's first quarter, investors flocked to Treasuries late last year, driving prices of government bonds roaring back from 16-year lows.

Following a massive U.S. employment report and a cautionary warning from the Fed last week that indicated the robust economy might trigger an inflationary resurgence if rates are reduced too soon, many are now readjusting their bets. The benchmark 10-year Treasury's yields, which are inversely correlated with price, have increased recently and are currently 20 basis points higher than their December lows.

Even though investors still anticipate many rate cuts from the Fed this year, they are less sure about the exact date and extent of the rate reductions that will occur. Bullishness is also being tempered by concerns about an anticipated increase in the supply of bonds as a result of government issuance.

Robert Tipp, Chief Investment Strategist and Head of Global Bonds at PGIM Fixed Income, managing $794 billion in assets, commented on the recent developments: "The combination of the jobs numbers and the Fed press conference has really caused a splintering in the potential outcomes."

He anticipates that 10-year yields this year could reach levels close to last year's peak of around 5%, up from their current rate of approximately 4.1%.

According to data from CME Group, futures linked to the Fed's policy rate late Tuesday indicated that investors are now attributing about a 20% probability to the Fed lowering interest rates in March, a significant drop from 64% recorded a month ago.

At the conclusion of last week's monetary policy meeting, Fed Chair Jerome Powell dismissed predictions of a March decrease, stating that policymakers wanted more assurance that inflation is heading near its 2% objective. During an appearance on CBS' "60 Minutes" on Sunday, he restated his opinions.

Predictions and Preparations for Potential Rate Drops

In the meantime, the likelihood of the first rate drop occurring in May has risen from 37% to 55% in only one month. From around 150 basis points in mid-January, investors are now factoring in a total of 122 basis points in decreases in 2024.

Before the Fed's policy meeting last week, John Madziyire, head of US Treasuries and TIPS at Vanguard, the second largest fund manager in the world, stated that he anticipated buying the drop if 10-year rates reached 4.25%.

For some, the retraction in Treasury bonds validated their concerns that the previous year's surge was exaggerated. The CEO of Tolou Capital Management, a hedge fund with headquarters in New York, Spencer Hakimian, has been adding shorter-term Treasuries and decreasing his exposure to long-term ones in recent weeks due to his anticipation that rates will stay high for longer than the markets had anticipated.

Investor caution is also being heightened by the over $2 trillion in anticipated new U.S. government bond issuance this year. This is because many feel that rates will need to increase to draw in purchasers. The October Treasury selloff was made worse by concerns about the U.S. budget, and rating agencies Fitch and Moody's issued warnings last year about the impact of rising interest rates on state finances.

Contrary to the equities selloff that sent Treasury rates skyrocketing in September and October, the increase in yields hasn't had much of an impact on stocks thus far. The S&P 500 is close to a new high and has increased by more than 4% year to date.