(Bloomberg) — Bond traders ended the week betting that the Federal Reserve will keep interest rates steady this year, on signs of a stabilizing US labor market and uncertainty about the economic impact of war in the Middle East.
Treasuries fell after better-than-expected March employment data, sending yields higher by three to four basis points across maturities in Friday’s abridged trading session. Traders erased what little remained of their wagers on Fed easing this year and trimmed expectations of a cut in 2027.
“This doesn’t push the Fed closer to raising rates; it also doesn’t help the rate cut case,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group.
The latest employment report offered a positive picture of the US employment market in March, showing an unexpected drop in the unemployment rate in addition to a bigger-than-estimated increase in nonfarm payrolls.
The potential for those elements to alarm Fed policymakers concerned about inflationary pressures in the US economy were offset by revisions showing even bigger job losses than previously reported for February. Also, the growth rate of wages slowed more than estimated.
But the $31 trillion Treasuries market remains transfixed by the war in the Middle East, which has disrupted oil supply from the region. Bond investors have been torn between growth and inflation risks posed by the surge in energy prices. US President Donald Trump, who ordered the Feb. 28 attack, has said Iran has until April 6 to reopen the Strait of Hormuz or have its power plants destroyed. It’s unclear if that deadline is still in place.
Yields over the past month largely tracked oil prices higher on the risk that rising gasoline prices in US inflation gauges would cause the Fed to delay any rate cuts.
With oil-market trading closed on Friday ahead of the Easter holiday, three tankers broadcasting Omani ownership appeared to have navigated the Strait of Hormuz by hugging their home country’s coastline. Still, the conflict escalated as Iran downed a US fighter jet.
Before the war started, overnight index swaps had priced in more than two quarter-point rate Fed cuts this year. Those expectations were subsequently erased, and traders began to price in the chance that the Fed’s next move would be a rate increase. More recently, the market has held back on committing to strong wagers in either direction.
The US central bank cut interest rates three times last year in response to weakness in the job market. They paused the cuts in January, citing improvement on that front. Since then, the US Labor Department’s monthly jobs report for January was stronger than anticipated, while February data showed weakness.