Market News

(Bloomberg) -- Short-term Treasury yields declined after two rarely influential pieces of economic data highlighted weakness in the US labor market ahead of broad data for February to be released Friday.

Two- and three-year note yields fell back below 4%, breached in the past week as investors ramped up bets the Federal Reserve will cut interest rates to blunt the economic impact of President Donald Trump’s tariffs and federal workforce reduction.

The two-year yield declined as much as nine basis points to 3.92% before paring its decline on reports the administration was backtracking on its tariff plans. It was around 3.96% in late trading. The bulk of the move to session lows occurred after a private-sector report on job-cut announcements found the most since July 2020, led by a spike in federal government jobs.

An hour later, the Labor Department’s weekly jobless claims data also reflected the federal job cuts. Though the distinct main tally of new claims declined more than economists anticipated, the total number of people receiving benefits rose, approaching a three-year high.

“The Treasury market is retaining the bulk of the constructive tone even as the jobless claims figures have offset fears on the employment front,” Ian Lyngen, head of US rates strategy at BMO Capital Markets said in a note. What happens next depends on what the broad jobs data to be released Friday “will reveal and the extent to which the release should be dismissed as stale information.”

Longer-dated yields, meanwhile, were whipsawed by the latest twist in the tariffs agenda, which has been marked by threats and rolling deadlines. Mirroring the pattern in US stock indexes, which slumped from record levels as this week’s implementation date approached, the 10-year Treasury yield climbed to session highs, but failed to sustain the move once the decision to pause the tariffs on Mexican and Canadian imports until April 2 was official.

Yields on 10-, 20- and 30-year debt climbed at least six basis points at one stage as US equity indexes pared their declines. The yields were back to little changed in late US trading, though, after retreating in tandem with stocks.

The shifts in Treasury yields occurred against the backdrop of a second day of surging government bond yields in Europe — where changes are afoot to allow increased borrowing to finance defense spending. Germany’s 10-year yield jumped as much as 14 basis points following a 30-basis-point increase on Wednesday. It ended just four basis points higher after the European Central Bank cut interest rates and hinted that it was near the end of its easing cycle.

The decision to exempt from Trump’s 25% tariffs goods from Mexico and Canada — the US’s two largest trading partners — that are covered by the North American trade agreement known as USMCA only briefly assuaged investors who’ve been concerned that a trade war would fan inflation and ultimately drag on growth.

US Labor Risks

The February employment report is expected to show payrolls increased by 160,000 and the unemployment rate held steady at 4%, the median estimates of economists in a Bloomberg survey.

The prospect of weaker US growth has bypassed sticky inflation as the major driver of Treasuries in recent weeks. Since peaking in mid-January, yields across maturities have fallen to the lowest levels since at least December as traders ramped up bets on Fed rate cuts resuming later this year, following the January pause.

The market-implied odds of a quarter-point rate cut in May have rebounded to about 50-50, and three quarter-point moves by year-end are almost fully priced in.

Fed Governor Christopher Waller, speaking Thursday afternoon in New York, said rates remain restrictive and two cuts this year is a reasonable forecast, however he’s not contemplating a rate cut at the next meeting on March 18-19.

(Adds tariff exemption for Canada and Waller comment and updates yield levels.)