Treasury yields (^FVX, ^TNX, ^TYX) are falling after fewer jobs than expected were added to the US labor market in August, growing by 142,000 nonfarm payroll jobs against estimates of 165,000. As the Federal Reserve gears up for its September meeting, more investors are beginning to price in the odds of a 50-basis-point cut to interest rates.
George Catrambone, DWS Group Head of Fixed Income, Americas, joins Morning Brief to discuss August’s jobs report and its implications on the fixed income market.
Catrambone explains that there’s a “little bit of a sense of relief” because the print came in low, but not too low as to create larger issues in the market. As the yield curve steepens and inverts, he highlights a larger problem at hand — revisions.
“This is now month after month of revisions, 111,000 or so revisions a couple of months ago. A very soft July report overall with a lot of distortions and now additional two-month revisions. I think the bond market is looking at this, and now it’s going to be incumbent on, I think the last two speakers that are coming in,” Catrambone says, referring to NY Fed President John Williams and Fed Governor Christopher Waller. “They’re the last word before we get into the blackout period to kind of clue the market in as to whether or not it’s 25 or 50 from here right now.”
As the Fed kicks off its rate easing cycle, Catrambone encourages investors to take advantage of a the period of time where the entire yield curve is above 5%. However, he warns: “What worries me is the fact that people aren’t talking about the $6.5 trillion in money market funds. So I think that’s also part of the story, that it’s not being priced out yet, and people are still sort of waiting in a complacent fashion.”
He believes the bond market is pricing in a 25-basis-point cut at the September FOMC meeting, and notes that a 50-basis-point cut is not totally off the table for November or December. Overall, the market is pricing in potentially 100-basis-points of cuts in 2024, he says. “I think it starts to get ahead of itself with nine and a half going into 2025 and still saying we’re going to have a soft landing. I think that’s where it’s a little bit of a question mark for me.”
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