Key US Yield Hits 4% for First Time Since August on Fed Rethink

The yield on the benchmark 10-year US Treasury is back at 4%, a level not seen since August, after a blowout jobs report forced traders to reassess the outlook for monetary policy.

Bonds dropped Monday, extending a plunge late last week, after surprisingly robust September payrolls data undercut chances for another big reduction in interest rates from the Federal Reserve. The 10-year yield rose four basis points to 4%, while the two-year yield was also closing in on that level, up six basis points to 3.98%.

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The move reflects swirling doubts over the Fed’s next move, with another bumper 50-basis-point cut entirely priced out for November’s policy meeting; even a cut half that size is no longer fully priced, according to swaps.

“We’ve expected higher yields but anticipated a somewhat gradual adjustment,” Goldman Sachs Group Inc. strategists including George Cole wrote in a note. “The extent of strength in the September jobs report may have accelerated that process, with renewed debate on the extent of policy restriction, and, in turn, the likely depth of Fed cuts.”

European bonds followed US Treasuries lower. The German 10-year yield rose four basis points to 2.25%, the highest in over a month, while its UK equivalent rose five basis points to 4.18%.

Bond Traders Buckle Up for ‘No Landing’ After Jobs Surprise

The selloff following Friday’s jobs data is just the latest twist in a year that’s forced investors to recalibrate their expectations for the economy and Fed policy numerous times. US services activity also caught traders off guard last week, exceeding all forecasts, and casting further doubt on theories that the economy was deteriorating more rapidly than feared.

The underperformance in shorter-dated US Treasuries, which are more sensitive to monetary policy, has left a key part of the yield curve on the brink of inverting once again. Historically, bond yield curves slope upward with longer notes paying higher yields, a norm that was disrupted for almost two years as the Fed hiked rates aggressively. The curve started to normalize last month, with two-year yields falling back below 10-year ones.

Traders are already looking ahead to US inflation data later this week. The consumer price index is seen rising 0.1% in September, its smallest gain in three months. Fed Chair Jerome Powell has said projections issued by officials, alongside their September rate decision, point toward quarter-point rate cuts at the final two meetings of the year.