There’s a fire sale in the bond market, and the November jobs report could make it burn even hotter. The wild move came amid speculation that Friday’s employment report could be better-than-expected, and drive interest rates even higher.
Interest rates surged Thursday, with the 10-year yield spiking as much as 12 basis points; the highest yield since June 2015. Yields move inversely to prices and rates snapped higher across the whole yield curve. In afternoon trading, some of the selling subsided, and the 10-year yield slipped back to just under 2.44 percent, but 2.50 is being watched as the next psychological line in the sand.
“In order to stay above 2.50, it’s got to be a really good number. The way we’re going, it’s like an unhinged market. It’s also going to be counterproductive for things down the road. This is not a healthy adjustment in rates. There’s going to be some losses on this,” said George Goncalves, head of rate strategy at Nomura.
The 10-year yield affects consumer loans especially home mortgage rates, which have already risen almost 4%. This type of activity typically causes mortgage borrowing to slow. The Fed is expected to hike rates Dec. 14, but traders have been speculating a stronger economy could force it into a faster hiking cycle next year.
Strategists say Thursday’s rate spike was driven by a combination of factors and at the same time inexplicable in its scope. The overriding themes are that the world is moving to a higher interest rate environment and for the first time in years, there could be inflation. OPEC’s deal to cut production Wednesday, drove oil prices 15 percent higher in just two days, ramping up inflation expectations that already had been on the rise.
President-elect Donald Trump’s plans to add stimulus to the economy, and cut tax rates for corporations and individuals, has added to expectations that an already warming economy could expand even more, and bring higher rates and inflation with it. U.S. data has also been better than expected, with data Thursday showing that manufacturing activity expanded in November more quickly than in any month since last year.
“There’s a new psychology in the market. We’ve spent so long looking to buy rates, we’ve switched around,” said Aaron Kohli, interest rate strategist at financial group BMO. This will be the most anticipated jobs report since last December, leaving most Americans cautiously optimistic.