TREASURY WRAP: T-NOTE (H5) FUTURES SETTLE 26+ TICKS LOWER AT 107-12+

Analysis details (20:05)

T-Notes bear flattened after a hot US jobs report and sees traders pare Fed rate cut bets. At settlement, 2s +13.2bps at 4.394%, 3s +14.6bps at 4.482%, 5s +14.1bps at 4.590%, 7s +12.2bps at 4.692%, 10s +9.3bps at 4.774%, 20s +6.1bps at 5.039%, 30s +4.5bps at 4.965%.

INFLATION BREAKEVENS: 5yr BEI +5.8bps at 2.533%, 10yr BEI +4.3bps at 2.443%, 30yr BEI +2.1bps at 2.387%.

THE DAY: T-Notes were sold across the curve in a flattening fashion after a monster US jobs report. The US economy added 256k jobs in December, above all analyst forecasts while the unemployment rate slipped to 4.1% from 4.2%. The reaction was hawkish which saw T-Notes hit lows of 107-12 from c. 108-00. The move had started to gradually pare before a surge in consumer inflation expectations via the UoM survey (both 1 and 5yr) saw further pressure on T-Notes which gradually sold off into settlement, testing the immediate post NFP lows. The hot data saw traders pare their Fed rate cut bets drastically with just 29bps of easing priced through year-end vs 39bps before the data - this fully prices just one rate cut this year by October, with just a 16% probability of a second rate cut by year-end, vs a 56% probability beforehand. Several large banks revised their Fed calls in wake of the data. Notably, Bank of America no longer expects any more Fed rate cuts, while JPMorgan expects the next rate cut in June (prev. March). Goldman Sachs only sees 50bps of easing this year (prev. 75bps). However, it is worth highlighting this is just one report and the Fed will want to take a look at several releases when making their decisions with two more jobs reports due between now and the March meeting. Still, the strength of the report supports calls for pushing rate cuts further out the curve while the Fed focuses on bringing inflation back to target. Nonetheless, there is clearly a wide range of views on the Fed with Goolsbee maintaining a dovish stance but Bowman on Thursday maintained her hawkish stance by noting she voted for a cut in December on the assumption it was the final step. One thing to watch will be if the strength of the labour market persists, it may start to put upward pressure on inflation again, something the Fed have said has not been the case recently. 

STIRS/OPERATIONS:

• Market Implied Fed Rate Cut Pricing: January 1bps (prev. 1bps), March 7bps (prev. 11bps), May 11bps (prev. 17bps), December 27bps (prev. 43bps).


• NY Fed RRP op demand at USD 179bln (prev. 168bln) across 48 counterparties (prev. 52).


• SOFR at 4.30% (prev. 4.29%), volumes at USD 2.211tln (prev. 2.213tln).


• EFFR at 4.33% (prev. 4.33%), volumes at USD 104bln (prev. 105bln).

10 Jan 2025 - 20:05- Fixed IncomeData- Source: Newsquawk