A roar erupted across the Cantor Fitzgerald LP trading floor in midtown Manhattan after the stronger-than-forecast May employment report sent bond traders scampering.
Treasuries tumbled, pushing 10-year yields to the highest since October, after the U.S. economy added more jobs than anticipated, fueling speculation the Federal Reserve may raise borrowing rates as soon as September.
“People were like, ‘wow, this is a strong number,’” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald in New York, one of 22 primary dealers that trade with the Fed. “The reactions were quick across the floor and then the rates desk started trading.”
Bond-market gains for 2015 have been wiped out this week as signs of growth in Europe push yields higher there and erode the relative attractiveness of U.S. government debt, which has served as a refuge since the global financial crisis. Traders of money-market derivatives lifted the chance of the Fed hiking rates in September to over 50 percent after the jobs report showed American payrolls climbed the most in May in five months.
Yields on 10-year notes climbed 10 basis points to 2.41 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.43 percent, the highest since Oct. 6. The low yield for the year was 1.64 percent on Jan. 30.
“It’s sell, sell, sell,” said Thomas Simons, a government-debt economist at Jefferies Group LLC, a primary dealer. “This alleviates a lot of the concern that the economy was not going to bounce back in the second half.”
The U.S. added 280,000 jobs last month, a Labor Department report showed, compared with a forecast for a gain of 226,000 in a Bloomberg survey of economists. Average hourly earnings increased 0.3 percent in May from the prior month and rose 2.3 percent from May 2014, exceeding the average gain since the current expansion began six years ago.
“The labor market is starting to become a little tighter - - it’s harder to find workers so you have to increase wages,” said Jim Caron, money manager in Morgan Stanley Investment Management’s global fixed-income group. “We’re at a turning point where if the data continues to get better, the U.S. will continue to lead rates higher. The rise in Treasuries year-to-date has come from what’s been going on in Europe.”
Fed fund futures give a 54 percent probability that the central bank will lift rates in September, up from 46 percent before the data release, according to data compiled by Bloomberg.
Signs of inflation in Europe and comments by European Central Bank President Mario Draghi this week anticipating greater volatility ahead sent German 10-year bond yields rising the most since 1999, sparking a selloff in global sovereign debt.
The 50 basis point rise in the 10-year Treasury yield since April 17 has some investors recalling the so-called taper tantrum two years ago, when hints that the Fed might soon end its bond-buying program sent bond yields soaring.
“It feels a lot like 2013 in some ways, but perhaps not quite that extreme,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “You don’t just have the Fed and the change in Fed expectations flopping back and forth every time we get weak data or strong data. You also have this overlay of what the ECB is doing and the tremendous volatility.”
At the Fed’s most recent policy meeting, many of the participants “thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied,” according to minutes of the April 28-29 Federal Open Market Committee session. The next committee meeting is June 16-17.
William C. Dudley, president of the Federal Reserve Bank of New York, said in a speech Friday that he expects “to support a decision to begin normalizing monetary policy later this year” if employment and inflation continue to improve. Dudley is a voting member of the Fed’s policy committee.
The central bank has kept its benchmark, the target for overnight loans between banks, in a range of zero to 0.25 percent since December 2008 to support the economy.
Cantor’s Lederer said this week’s large intraday market swings caused him to raise his usual daily iced coffee consumption from two cups to three.
“The volatility is back and we’ll see where we go from here,” he said.