Treasury bond investors seeking more clarity about when the Federal Reserve will raise interest rates may get more than they bargained for in next week’s employment report.
Yields on the benchmark 10-year note are approaching the highest level of the year with economists forecasting another strong month of job gains. That has bond bears betting the data will give the Fed enough reason to raise its key lending rate before the end of the year.
“The labor market’s been improving and there will come a point when the market will wonder whether the Fed may be getting behind the curve,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Market participants are going to determine whether the data warrants the Fed making a move. If the data warrants higher rates, the market will take it there.”
The Treasury benchmark 10-year yield rose as high as 2.4872 percent Friday, just below the 2015 high of 2.4985 percent on June 11. The yield has climbed 55 basis points, or 0.55 percentage point, since the end of March and is on track for the steepest quarterly climb since the second quarter of 2013 during the taper tantrum, according to Bloomberg Bond Trader prices.
The two-year Treasury note has risen 16 basis points to 0.71 percent, its biggest quarterly gain since the first three months of 2011.
U.S. government bonds are on pace for their first quarterly loss since the fourth quarter of 2013, according to Bloomberg U.S. Treasury Bond Index data.
The U.S. economy has been adding jobs at a pace of 227,000 jobs per month since the start of 2013, helping to pull the unemployment rate down to 5.5 percent, or 1 percentage point below the target set by the Fed in December 2012. The economy added 280,000 jobs in May, the most since December.
At her June 17 press conference, Fed Chair Janet Yellen highlighted employment gains as a sign of economic strength, signaling that the U.S. is still on track for a rate increase this year.
“Since the committee last met in April, the pace of job gains has picked up and labor-market gains have improved further,” Yellen said.
Consumer activity may be starting to add to the momentum pushing Treasury yields higher and pulling Fed expectations forward. Household spending climbed in May by the most in almost six years, buoyed by gains in incomes as the U.S. job market strengthened. Purchases increased 0.9 percent, the biggest gain since August 2009, after rising 0.1 percent in April.
Another sign of strength comes from the pace of initial jobless claims, which has slowed, holding below 300,000 each week since March, and reaching a 15-year low of 262,000 for the week of April 24.
Once the Fed does raise interest rates, though, investors should be careful not to expect additional increases at a rapid clip.
“The market is still feeling that the Fed’s hike pace won’t be all that changed even if September looks like the most optimal liftoff point,” said Edward Acton, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed.
While forecasting as many as two increases this year, Fed officials reduced forecasts for rate increases in 2016 and 2017.