By: Michael Mackenzie and Benjamin Purvis

(Bloomberg)–Treasury yields leaped Friday after US employment data for April tamped down expectations that the Federal Reserve will soon reverse this week’s interest-rate increase and as shares in regional banks rebounded. The yield increases were biggest for short-maturity Treasuries that are most sensitive to changes in the Fed’s policy rate, which was increased to a range of 5% to 5.25% on Wednesday. The two-year note’s yield rose as much as 15 basis points and in late trading was higher by 13 basis points at 3.92%. The 10-year yield rose 6 basis points to 3.44%. Rates on swap contracts linked to Fed meetings — which on Thursday briefly priced in a rate cut in July — moved higher, to levels consistent with a stable policy rate until September and at least two quarter-point cuts by year-end. The rate-cut thesis is based on apparent stress for many regional banks after 10 increases since March 2022.

“Some of that cut pricing will go down, but the labor market is a lagging indicator of the economy and we know the banks are tightening lending standards,” said Priya Misra, global head of rates strategy at TD Securities. The Fed announcing this week’s rate increase for the first time signaled openness to pausing its campaign against high inflation to assess the impact of its moves thus far. Chair Jerome Powell discussing the move added that the current outlook for inflation suggests rate cuts are unlikely this year. While April inflation data to be released next week is expected to continue to show a 5% rate, investors will also scrutinize a report that’s not normally a market-mover. The Fed’s quarterly senior loan officer survey Monday is expected to show further tightening of bank lending.

“If you look at recent data, they are not cutting rates anytime soon unless something systemic forces their hand,” said Gregory Faranello, Head of US Rates Trading and Strategy for AmeriVet Securities. However in the wake of the jobs data, he said there was buying of short-dated Treasuries, which is notable “given these levels are so far below the funds rate. People are nervous about the banking sector.”

The US added more jobs in April than expected and the unemployment rate fell back to a multi-decade low, highlighting the resilience of the labor market despite growing economic headwinds.

Nonfarm payrolls increased 253,000 after a downwardly revised 165,000 advance in March, a Bureau of Labor Statistics report showed Friday. The unemployment rate declined to 3.4%, and monthly wage gains accelerated to the fastest rate since July. The prior two reports showed a downward revision of 149,000 jobs.

“When you look at today’s report this is not getting back to the slowing that the bond market is expecting, that the Fed is hoping for,” Jeffrey Rosenberg, BlackRock Inc.’s senior portfolio manager told Bloomberg Television Friday.

Front-end Treasury yields remain lower on the week, with the two-year down from 4%. By contrast, longer yields are higher, and the curve has steepened, a trend that typically gathers pace when the Fed pauses a rate-hike cycle and the
market anticipates cuts.

–With assistance from Liz Capo McCormick