Bond Traders Just Raised the Stakes for Jobs Day

(Bloomberg Opinion) -- Traders in the world’s biggest bond market are going all-in on bets that the U.S. economy is as “extraordinary” as Federal Reserve Chairman Jerome Powell said this week.

After months of trading in a well-defined range, the benchmark 10-year Treasury yield ripped higher, climbing above 3.14 percent, breaking through the previous 2018 high of 3.1261 percent to levels not seen since 2011. When combined with multiyear highs set across Treasury maturities, it reaffirms that the bond bears are in control. Jim Vogel at FTN Financial Capital Markets described Wednesday’s trading as investors “selling while the selling is bad before it gets worse.”

This raises the stakes for one of the most-watched U.S. economic releases each month: the Labor Department’s payrolls report. On Friday, it’s expected to show that American businesses added 181,000 workers in September, that the unemployment rate dipped to 3.8 percent and that average hourly earnings continued to grow at close to the fastest pace since the recession ended.

Nothing of late suggests the U.S. economy won’t hit those marks. Powell said in a speech Tuesday in Boston that “we remain in extraordinary times,” referring to low unemployment coinciding with low inflation. The Fed seems committed to gradual interest-rate increases, helping to support the hedge funds and other large speculators who are positioned for higher yields.

It’s clear that the $15.3 trillion Treasury market faces an inflection point. This big sell-off coincides with the biggest one-day jump since October 2017 for Citigroup Inc.’s economic surprise index. On Wednesday alone, an Institute for Supply Management survey showed U.S. service industries unexpectedly rose to a near-record level in September, while data from the ADP Research Institute showed U.S. businesses added 230,000 workers in September, the most in seven months and better than the 184,000 estimate.

That’s not just a lot of good news for the economy — more crucially, that’s a lot of unexpectedly strong data. The recent string of figures have actually been worse than expected, as a whole, based on the Citigroup index. And yet Treasury yields still climbed during that period. Now the gauge is positive for the first time since mid-July. If that trend continues, bond bears have every reason to expect their bets will pay off.

Every data point matters, of course, including durable goods orders on Thursday. But jobs day is when bond traders have historically rendered their verdict on the economy and Treasury yields. Last month, they realized wage growth might not stay stubbornly low forever. This time, they may come to grips with the fact that U.S. yields don’t have to stay so low, either.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2018 Bloomberg L.P.