Bond traders are betting in advance that continued weakness in nonfarm payrolls, cooling AI investment expectations, falling oil prices and safe-haven inflows will together compress the room for further Federal Reserve rate hikes.
Based on the latest moves in the Treasury market, US bonds are pricing in "narrowing room for further rate hikes," with these veteran fixed-income traders wagering that a potentially soft nonfarm payrolls report, easing inflation pressure from lower oil prices, and safe-haven demand triggered by the stock market selloff will jointly drive bond prices higher and push down yields across the curve.
The October US nonfarm payrolls report, due at 21:30 Beijing time on November 6, has therefore become a key test for this round of stock and bond repricing. According to the median estimate in a Bloomberg survey, economists expect job growth of 65,000 and the unemployment rate to hold at 4.2%; as of press time, the 10-year Treasury yield had fallen to about 4.82%, and interest rate swap markets priced about a 68% chance of a December rate hike. Markets are scaling back the magnitude of further tightening, but a hike remains the most likely scenario for the Fed's December FOMC meeting. The change that bond investors should pay closer attention to is that some institutions are preparing to use any price pullback triggered by strong jobs data to add to Treasury positions amid rising risk aversion and elevated yields.
AI selloff collides with nonfarm payrolls as Treasuries front-run narrowing hike room
The market environment for this US nonfarm payrolls report has shifted from post-election sector divergence to broad risk contraction. As of Thursday's US stock close, the Nasdaq 100 Index, known as the "global tech stock bellwether," fell 6.36%, its largest single-day drop since March 2020, while the S&P 500 fell 4.36% and the Philadelphia Semiconductor Index plunged 12.25%. On Friday, the selloff continued to spread to Asia: South Korea's KOSPI briefly fell below 5,000 intraday and triggered a circuit breaker, eventually closing down 6.02% at 5,059.69; Japan's Nikkei 225 closed down 5.96%. Concerns that US data center construction may slow are being transmitted to Asia's export chain through chip orders, equipment procurement and capital expenditure expectations. Against this backdrop, tech stocks face both earnings expectation adjustments and valuation pressure from investors demanding higher risk compensation.
Wall Street is fairly unanimous on the direction of a rebound in US corporate hiring, but clearly divided on the strength of nonfarm payroll growth. Goldman Sachs, Bank of America and JPMorgan all expect 75,000 new jobs; Citi, UBS and Wells Fargo expect 65,000; Morgan Stanley expects 60,000, Deutsche Bank expects 55,000, Barclays expects 50,000, and TD Securities expects 40,000. Mitsubishi UFJ Financial Group has a higher forecast of 90,000, mainly based on rising job vacancies in some industries and favorable seasonal factors. These major bank forecasts also mean that a result slightly above 65,000 is already within the expected range of several major banks. What truly determines the strength of the rate shock is whether new jobs, the unemployment rate, wages and prior-month revisions together point to a reacceleration in demand.
The market expects average hourly earnings to rise 0.3% month-on-month and annual growth to slow to 2.9%; if hiring recovers while wage pressure continues to ease, corporate revenue and profits could still be supported while reducing the need for additional tightening. The latest productivity data also supports this possibility: third-quarter nonfarm business sector labor productivity rose 3.6% at a seasonally adjusted annualized quarterly rate, while unit labor costs fell 0.7% on the same basis, indicating that output expansion does not necessarily push up unit labor costs in tandem. Revisions are equally important: August job growth has already been revised down from 162,000 to 133,000, and the 29,000 nonfarm payroll figure was the September initial estimate and may face further adjustment on Friday.
Treasury traders build bullish positions before the jobs report
As expectations for further Fed rate hikes continue to fade, bond traders are positioning before Friday's October employment report, betting on further gains in the US Treasury market. A global stock selloff after the US midterm elections prompted investors to turn to Treasuries for safety this week, pushing yields on Thursday to their lowest levels since early September. On Friday, as the stock decline intensified, the 10-year Treasury yield stood at 4.82%. The recent rally has strengthened traders' confidence, and they are beginning to target opportunities for further yield declines in the coming days. In the options market, one trade bets that the 10-year yield could fall to 4.7% by the end of next week, while another expiring on November 20 targets a scenario in which the yield falls to about 4.35%. Although October employment data is expected to improve from September, even if the data comes in stronger than expected, the Treasury rally could continue as long as investors are prepared to buy into the selloff.
Jamie Patton, co-head of global rates at TCW Group, said that if the data is strong, "we would be more likely to add to purchases than to sell." As the chart above shows, as the Treasury market leans toward reducing Fed rate hike expectations, US two-year Treasury prices have risen -- higher Treasury prices mean lower yields. Patton's view aligns with the findings of a survey by BMO Capital Markets strategists. Strategists led by Will Hartman said in a report that although investors are "cautiously inclined to believe yields will move higher," they are "preparing to add duration if Treasuries sell off after the nonfarm payrolls report." BMO's monthly survey asks investors how they plan to respond to Treasury yield changes triggered by employment data, and the latest survey found that 48% of respondents would buy on price declines, above the 43% average of the past six months and the highest proportion in four months.
The US war with Iran drove oil prices higher and kept inflation elevated, while the AI investment boom boosted US stocks. Against this backdrop, the Fed implemented its first rate hike since 2023 in September. Since then, however, expectations for further hikes have gradually weakened, especially after the Fed kept rates unchanged in October. The Fed said at the time that economic conditions allowed it to wait for more data to guide its next policy decision on December 9. Interest rate swap markets currently reflect about a 68% probability of a December hike; for the policy path through mid-2027, the market has not yet fully priced in two 25-basis-point hikes. Just last month, these contracts had fully priced in three hikes by then.
Gennadiy Goldberg, head of US rates strategy at TD Securities, said: "We expect Friday's data to be slightly soft, but for the market, the fundamentals remain crucial. The economy we see is still quite strong, and the labor market is in a 'low hiring, low firing' state, so over the past few weeks, the market has already scaled back a considerable portion of rate hike expectations." By the time Fed policymakers meet in December, they will also see November employment data scheduled for release on December 4. They will also have this month's inflation indicators -- the October consumer price index due on November 10, and the personal consumption expenditures price index, or PCE price measure, from the October personal income and outlays data due on November 25.
This week, crude oil prices fell to two-month lows, partly due to market expectations that the election outcome could prompt a faster end to the Iran war. This drove market-implied inflation expectations sharply lower. The breakeven inflation rate on five-year US Treasury Inflation-Protected Securities, or TIPS, fell this week to about 2.27% from 2.5% at the end of last week. This gauge represents the average CPI increase needed for inflation-protected Treasuries to match the returns of higher-yielding ordinary Treasuries. The October employment report will be released at 8:30 a.m. Washington time on Friday. The median forecast in a Bloomberg survey expects nonfarm payrolls to increase by 65,000. September job growth was 29,000, below all forecasts in the survey at the time, though that figure will face revision in the October report.
Oliver Chambers, head of fixed-income separately managed accounts at Clark Capital Management, said: "Over the past two or three months, it seems there has been a large revision in one direction each time, followed by a revision back the next month. This slowdown needs to return to some degree of normalcy."
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