Traders now price in a Fed rate hike by December after US payrolls exceeded forecasts, lifting yields across the curve.
US Treasury yields climbed sharply Friday after May jobs data surpassed all estimates, prompting traders to fully price in a Federal Reserve rate hike by year-end. Two-year note yields jumped 11 basis points to 4.15%, the highest level this year, while five-year yields rose 10 basis points and 10-year yields gained seven basis points to 4.53%.
The shift follows a consensus formed since late February, when inflation expectations surged amid geopolitical tensions. Rate-cut bets for 2024 have since evaporated, with markets now anticipating the next Fed move to be a hike. Interest-rate swaps show a roughly 60% chance of a quarter-point increase as early as October.
The dollar strengthened alongside the yield surge, reflecting growing expectations that the Fed may need to act sooner than previously anticipated. Policymakers will convene for their next meeting on June 16-17 under Chairman Kevin Warsh’s leadership.