Yields whipsaw in volatile session, end near three-week highs

NEW YORK, Jan 5 – US Treasury yields whipsawed on Friday after a strong jobs report and an unexpectedly weak reading of the services sector gave clashing views of the strength of the US economy.

Yields, which move in the opposite direction of prices, hit three-week highs early in the trading session after a better-than-expected nonfarm payrolls report.

But they later nosedived, taking the 10-year Treasury back below 4%, after the Institute for Supply Management (ISM) said service sector employment plunged to 43.3 last month, the lowest level since July 2020. The index was at 50.7 in November.

In afternoon trading, the yield on 10-year Treasury notes climbed again, notching 6 basis points to 4.051%. On the week, the 10-year yield rose 13.1 basis points, the largest one-week gain since mid-October.

Jobs have become a focus for markets as investors look to anticipate the timing of the first interest rate cut by the US Federal Reserve. Persistent labor market strength threatens to accelerate inflation, forcing the Fed to maintain or raise rates after its most aggressive hiking cycle since the early 1980s.

“I don’t know how to classify this (ISM) report other than to say it was absolutely dismal,” said Jeff Klingelhofer, co-head of investments for Thornburg Investment Management.

“One data print is one data print but currently you have two very different reads into the employment side of the consumer equation,” he added.

Futures markets reversed following the ISM report.

Markets are now pricing in a 33% chance that the Fed keeps benchmark rates at their current range of 5.25% to 5.5% at its March meeting, down from a 44% chance seen shortly after the nonfarm payrolls report, according to CME’s FedWatch Tool.

And markets are pricing in a 62% chance of a 25 basis point rate cut, up from a 53% chance seen earlier in the day.

Overall, markets see the Fed cutting rates by a total of 143 basis points by the end of the year, down from expectations of more than 160 basis points two weeks ago.

Volatility will likely continue in the weeks ahead as more Treasury supply and corporate bond issuance comes to the market, said Chris Gunster, head of fixed income at Fidelis Capital.

“Markets are starting a new year and comparing their expectations with the Fed and with the data and saying there’s a disconnect here,” he said. “Now you’re starting to see yields back up and we think we’re going to see more of that as the year moves on.”

The yield on the 30-year Treasury bond was up 7.3 basis points at 4.208%.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 1.3 basis points at 4.395%. The two-year year rose 13.2 bps this week, the biggest gain since early December.

January 5 Friday 3:29 PM New York / 2029 GMT

(Reporting by David Randall; Editing by Susan Fenton, Barbara Lewis, Jonathan Oatis, and Alexander Smith)