Bond Yields Soar After Robust January Jobs Report
Bond yields saw a significant increase on Friday following the release of the January employment report. Despite weaker-than-anticipated hiring, robust economic indicators suggest a robust labor market, leading to market expectations of continued elevated interest rates.
The yield on the 10-year US Treasury note spiked by six basis points during the morning session, reaching 4.5%. This surge occurred shortly after the announcement that employers added 143,000 jobs in January, falling short of the estimated 169,000.
Investors responded by increasing their anticipation of the Federal Reserve (Fed) maintaining current interest rates. According to CME FedWatch, the probability of the central bank refraining from rate cuts at its March policy meeting climbed to 91% from 84% the previous week. The likelihood of unchanged rates at the May meeting also rose, from 60% to 70%.
While a shortfall in payroll estimates typically implies a more accommodative stance from the Fed, the January report exhibited other indicators of economic vigor, dampening prospects for near-term rate cuts.
"The Fed will not perceive any reason to adjust its near-term plans based on the employment report," stated Bill Adams, chief economist at Comerica Bank.
Wages, a key inflation indicator, increased by 4.1% year-over-year, surpassing economists' forecasts of 3.8%. The unemployment rate also declined to 4%, its lowest level since May 2022. Additionally, job gains for November and December were revised upwards by a combined 100,000.
Investors expressed optimism regarding labor market strength but remained cautious about its implications for interest rates in 2025.
"While January payrolls fell short of expectations, revisions to the prior two months net out to a 73,000 change in payrolls relative to expectations," noted Jason Pride, chief of investment strategy and research at Glenmede. "The Fed has been gradually extending expectations for its next rate cut, and this report likely supports that approach, possibly even prompting further extensions."