Hopes for interest rate cuts are back.
U.S. bond yields were sharply lower on Friday after an October jobs report signaled softening in the labor market, helping lift shares of one of the largest Treasury exchange-traded funds.
The pullback in longer-duration Treasury yields helped shares of the roughly $42 billion iShares 20+ Year Treasury Bond ETF
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rally as much as 2.3% on Friday. It has given up about half of its daily advance in afternoon trading but was still on pace for a roughly 5.4% three-day gain, its biggest since Oct. 27, 2022, according to Dow Jones Market Data.
The question on on Friday was whether a relatively weak jobs report might point to a stumbling economy that could prompt more rate cuts by the Federal Reserve in 2024 than Wall Street was anticipating only a few days ago.
“It’s telling us that the economy is showing signs of softness and that the Fed might be done with its rate-hiking cycle,” said BeiChen Lin, an investment strategy analyst at Seattle-based Russell Investments, which has about $292 billion in assets under management.
Read: Fed’s Barkin says October data shows gradual cooling of job market
But Lin also said Refinitiv data show that expectations for how high the Fed will keep its interest rate through 2024 have dropped to about 4.4% on Friday, from above a 4.5% level a few days ago.
Since July, the Fed has held its policy rates to a 5.25%-5.5% range, a 22-year high. The central bank began in March 2022 to quickly jack up rates to fight soaring inflation, causing bond and stock prices to tumble. Bond prices and yields move in opposite directions.
“Bonds are going to be pretty important,” Lin said, noting how the selloff in bonds that briefly took the 10-year Treasury yield
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to 5% in October also makes similar yields look pretty attractive for investors over the long run if the Fed is forced to cut rates significantly.
“It’s been quite the move in yields from where we were a few weeks ago, ” said Alex McGrath, chief investment officer for NorthEnd Private Wealth, in a phone interview Friday, calling the 10-year Treasury yield at 5% a “gale-force wind on valuations in the equity market.”
U.S. stocks
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were higher Friday, heading for the best week of this year. The 10-year Treasury tumbled 15 basis points on Friday to 4.52%, according to FactSet.
Still, McGrath isn’t rushing into long-dated bonds yet. Instead, like many investors, he prefers to stay short-duration in risk-free assets yielding about 5.5% to 6%.
“I don’t love adding duration because of how volatile it has been since April,” he said.
Related: ‘T-bill and chill’ trade sees big influx from individual investors
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