(Bloomberg) -- Bond traders priced in an earlier start to expected Federal Reserve interest-rate cuts on fresh clues the US job market is losing momentum.
Swap contracts tied to Fed policy shifts briefly traded at levels indicating the Fed will lower rates as soon as September, versus October previously. The move stalled amid a jump in short-term euro-zone yields after comments by European Central Bank President Christine Lagarde prompted traders to trim wagers on another ECB rate cut this year.
With more comprehensive May employment data to be released Friday, an unexpected increase in new jobless claims sparked the shift in the Fed outlook. The US Treasury market rallied in tandem, following its biggest daily advance in two months on Wednesday, also in response to a weak job-market indicator.
“The economy is slowing,” Krishna Memani, chief investment officer for Lafayette College, said on Bloomberg Television. “The hard data is softening. There is a substantial trend for slowing in the economy” that “gives the Fed the path to cut rates, not today, but in the later half of the year.”
The two-year Treasury yield, most sensitive to Fed policy expectations, was back to little changed after falling as much as four basis points, while long-maturity tenors held small gains. Swap contracts continued to fully price in at least two quarter-point cuts by year-end.
Short-term German yields jumped to a two-week high after Lagarde said the ECB was approaching the end of its monetary policy cycle and may revise its growth forecast higher in the future.
Bond-market momentum also was sapped after reports US President Donald Trump and Chinese President Xi Jinping held their first official phone call since Trump took office in January. Trade tensions between the world’s two largest economies have caused bouts of risk aversion and capital flows from stocks into bonds.
As measured by the Bloomberg Treasury Index, Wednesday’s gain — sparked by a sub-par gauge of private-sector job growth — was the biggest since April 3. Futures open-interest data released after the close indicated new long positions were set, and the 10-year note contract’s price reached a level that was likely to cause shorts to cover, interest-rate strategists at Citigroup said.
The jobless claims tally refocused investor attention on the prospect that the Fed will act to prevent further labor-market erosion, even as short-term inflation expectations have picked up based on the Trump administration’s tariff’s agenda.
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Ahead of Friday’s May employment report, however, it wasn’t enough to trigger sustainable gains in Treasuries.
“The claims numbers are trending higher but it’s not in alarming territory,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
Friday’s report is expected to show nonfarm payrolls increased by 125,000 in May, following a 177,000 jump in April. Faranello said it would take an increase of less than 100,000 to spur Treasury yields to new weekly lows.
Earlier Thursday, Treasuries firmed after a sale of Japanese 30-year bonds drew better-than-expected demand. Still, US bonds continue to struggle with investor concern about the nation’s fiscal outlook.
The 30-year Treasury yield remains more than 20 basis points higher since the end of April. Catalysts included Moody’s Ratings stripping the nation of its last top-tier credit score and the US House of Representatives passing a multi-trillion dollar bill extending tax cuts.
“Fiscal concerns in the US will prevent any meaningful rally,” said Mohit Kumar, chief European strategist at Jefferies International. He expects 10-year yields to trade in a 4.25% to 4.75% range despite softening economic data. “If we rally toward 4.25% in 10s we would use that opportunity to reset a short position.”
--With assistance from Alice Atkins, Naomi Tajitsu, Aline Oyamada, Michael Mackenzie and Edward Bolingbroke.