Have bond traders underestimated the economy? Jobs data will tell

investmentnews.com:

Bond traders who powered a ferocious rally in the $26 trillion U.S. Treasury market are about to find out if they’ve gotten ahead of themselves.

Softening inflation and employment data in the past month have convinced investors that the Federal Reserve is done raising interest rates and ignited bets that cuts of at least 1.25 percentage points are in store over the next 12 months. Treasury yields, which touched highs of 5% as recently as October, have declined sharply, with the 10-year benchmark sliding more than three-quarters of a percentage point.

Now into the mix comes a key report Friday on the U.S. labor market, which bulls hope will provide fresh evidence of a cooling economy. The bond market is already pricing in more than twice as much monetary easing in 2024 as Fed officials themselves, who while signaling they’re likely done raising rates have also been quick to caution that any talk of cuts is premature for now. 

Traders remain unfazed: A JPMorgan Chase & Co. survey released earlier this week showed clients maintaining their largest net long positions since Nov. 13. 

Friday’s report is expected to show moderating employment and wage growth in November but no major deterioration in hiring. Given the recent run-up in bonds, there’s a risk of a market reversal — at least initially — on any surprises that challenge traders’ bullish narrative. 

“This rally in Treasuries needs to be validated,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree. “The bar has been raised now in terms of the economic and inflation numbers coming in, and they’re going to have to show that the momentum of a slowdown is picking up.”

Payrolls probably grew by 183,000 last month, after increasing 150,000 in October, while