Treasury Market Rallies in Rethink of Bet on Fed Rate Hikes
The Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S. (Photographer Samuel Corum/Bloomberg)

Treasury Market Rallies in Rethink of Bet on Fed Rate Hikes

The Treasury market probably could use a do-over as the selloff unleashed by Friday’s strong March employment data increasingly looks like a judgment error.

The data came during a holiday-shortened session with U.S. equity markets closed for Good Friday, and it ushered in a crowd of bets that the Federal Reserve -- whose officials repeatedly have said they’re not even thinking about thinking about raising interest rates -- would tighten by the end of next year.

In keeping with that idea, the five-year note’s yield climbed to 0.98% Friday from around 0.90%, putting it at what was then the highest level in more than a year. It then erased most of that move on Monday -- despite a record high for the March ISM Services Index -- and retreated to under 0.88% on Tuesday. Likewise, short-term interest-rate markets, where more precise wagers on Fed policy are made, took pricing for the central bank’s December 2022 meeting down to an increase of 20 basis points from a peak of around 28 basis points on Monday.

“Longer term, ISM and the jobs report will matter, but we trade in the short run, and there’s pent-up demand from quarter-end, a lack of long-end supply this week, and buybacks that are ongoing,” said Ray Remy, co-head of fixed income at Daiwa Capital Markets. “Last week’s high yields will be most likely revisited.”

Treasury Market Rallies in Rethink of Bet on Fed Rate Hikes

The swift reversal is at least vindication for strategists at Barclays and TD, who immediately saw the selloff as an overreaction and recommended buying the five-year sector.

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