By Serafino Tobia, Director of Agency CMBS Trading and Portfolio
- The 10-year Treasury yield is currently 4.13%, 3 basis points higher since last Monday morning. 10-year bonds traded in a 10 basis points range this past week (4.05% to 4.15%).
- 2-year Treasuries are at 3.64% this morning, 4 basis points higher since last Monday.
Last Week’s Trading Recap – Last Wednesday, the 10-year yield improved to the low end of the range (4.05%) after a new weekly ADP report showed companies cut about 45,000 jobs in October, reinforcing expectations for economic slowdown and a Fed rate cut at the December 10th FOMC meeting. The government shutdown officially ended later Wednesday removing a major source of uncertainty. Initially the government re-opening supported bond yields, but the positive sentiment faded as the markets focused on more hawkish Fed commentary and uncertainty about what the economic data will show when it resumes this week.
Last Week’s Economic Data
With the government shutdown in effect, there was no official data this past week.
Last Wednesday, ADP’s new weekly NER Pulse series reported that companies cut about 11,250 jobs per week in October (roughly 45,000). This weekly data seems inconsistent with the ADP National Employment Report print on November 5th which indicated +42k job growth in October. However, the weekly data measures job cuts only, not the overall net gain or loss including new hires. The weekly data also shows that the weakness occurred in the second half of October, signaling a slowdown trend.
Fed Monetary Policy
The overnight Fed Funds rate is 3.87% (Fed target range 3.75%-4.00%). We received two ¼ point rate cuts over the past couple months as the Fed responded to the pronounced slowdown in job growth over the summer. However, last week, Fed officials, including Atlanta Fed President Bostic on Wednesday, stressed concern about inflation remaining sticky around 3% and arguing that the Fed should skip any rate cut at the next FOMC meeting on December 10th. Other Fed officials, like Fed Governors Miran and Cook, commented that current policy remains restrictive and they are more concerned about the weakening labor market. Fed Chairman Powell last Wednesday restated that a rate cut in December is “not a foregone conclusion,” emphasizing a data-dependent approach with the extra uncertainty caused by delayed economic reports with the government shutdown.
The market has backed away from expecting a rate cut at the next FOMC meeting. The yield curve now implies just a 0.108% cut in the Fed Funds rate in December (versus 0.175% implied last Monday). The yield curve implies the Fed Funds rate to be 3.079% by the end of 2026 (as opposed to 2.92% before the Fed rate cut decision three weeks ago).
My Take on Longer Term Yields
I could see yields move sharply this week with the bond market bracing for the resumption of data from the federal agencies with the shutdown resolved. Key reports on inflation (CPI, PPI, PCE) and non-farm payroll data will shape the outlook for the economy and the likelihood of a Fed rate cut next month. If we get signs of progress on inflation or indications that the labor market is weakening further, the 10-year could move back below 4%. Of course, high inflation prints or data that shows a resilient/firm economy will keep 10-year yields between 4.10% - 4.25% range.
Fundamentally, 10-year yields are a function of:
- Inflation expectations over the 10-year period plus
- Spread for a real return and
- Extra spread for term risk.
Of course, the formula isn’t that simple; expected inflation is not a known number. The University of Michigan survey shows consumers are expecting inflation to be about 4.7% over the next year (driven in large part due to the pass-through of the tariffs) and 3.6% over 5-10 years. If the market fully priced-in 3.6% long term inflation level, 10-year yields would likely be closer to 5%. Instead, the current 10-year yield near 4.10% suggests that investors expect the Fed to move inflation towards its 2% target, implying a market-based inflation breakeven at around 2.50%-2.75%. The gap between the U Mich consumer survey and market pricing highlights the bond market’s confidence in the Fed to maintain its inflation-fighting credibility. The key question now is how that credibility may be tested leading up to when Fed Chairman Powell is replaced in May next year.
This Week’s Economic Data
With the government shutdown ended, it will take some time for the federal agencies to resume consistent and complete data reports. We will start to receive some of the data this week - the first such report is likely to be the September US employment report scheduled to be released on Thursday (originally scheduled 10/3). This data is somewhat dated arguably but if the job growth prints low, it would add to the narrative that the jobs market continues to weaken and is likely to help push rates lower.
The October Jobs report and the CPI and PPI data for October may never be printed or severely delayed because data collection was halted during the shutdown.
This Wednesday we will receive the FOMC meeting minutes from the October 29th meeting. This will provide some insight into the divide among the committee members’ concerns over inflation versus the labor market.
About Serafino:
Serafino is Greystone’s director of trading in Agency CMBS (Fannie Mae DUS) and GNMA/FHA securities, interest rate caps and also directs Greystone’s proprietary portfolio investments in these types of securities, FHA-insured mortgages, and tax-exempt municipal bonds. Mr. Tobia previously traded bonds and muni derivatives at Lehman Brothers and at other NY banks/securities firms. Serafino holds a B.A. in Economics from Brandeis University and an M.B.A. in Finance from NYU’s Stern School of Business.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.